Regulators approve living wills designed to avert future bailouts
The biggest US banks got another boost from Washington on Tuesday when watchdogs gave them passing grades on a test designed to prevent the kind of meltdown triggered by the failure of Lehman Brothers.
The Federal Reserve and Federal Deposit Insurance Corporation found that “living wills” drawn up by eight of the country’s largest and most complex banks, which show how they could be wound up in a crisis without taxpayer support, were satisfactory.
While the regulators found the plans from Wells Fargo, Bank of America, Goldman Sachs and Morgan Stanley had some “shortcomings”, the problems were not as serious as those identified in previous years.
The findings, which the Fed said reflected “significant progress”, cap a year of regulatory wins for the industry that have helped push shares in S&P 500 banks up by a fifth in 2017 to record highs. Higher interest rates and tax cuts that are on the brink of becoming law this week have also fuelled the rally.
The living will regime, a central pillar of the Dodd-Frank reforms introduced after the Lehman crisis, is aimed at improving the safety and soundness of the financial system and avoiding the need for government bailouts. Regulators have powers to force banks to shed chunks of their business if they persistently fail to meet the required standard.
Last year, only Citigroup received an entirely passing grade. Then, the two regulators ruled that five banks’ living wills had “deficiencies”, meaning they were “not credible, or would not facilitate an orderly resolution”.
One of those five, Wells Fargo, failed to fix the problems, prompting watchdogs to place restrictions on its business, although these have since been lifted.
This year, none of the plans had “deficiencies”. Four banks — Citi, JPMorgan Chase, State Street and Bank of New York Mellon — got the all clear. The others have been told that their subsequent submissions require “additional work”.
The Fed has signalled it is open to letting banks submit their resolution plans every two years, instead of annually.
The biggest US banks got another boost from Washington on Tuesday when watchdogs gave them passing grades on a test designed to prevent the kind of meltdown triggered by the failure of Lehman Brothers.
The Federal Reserve and Federal Deposit Insurance Corporation found that “living wills” drawn up by eight of the country’s largest and most complex banks, which show how they could be wound up in a crisis without taxpayer support, were satisfactory.
While the regulators found the plans from Wells Fargo, Bank of America, Goldman Sachs and Morgan Stanley had some “shortcomings”, the problems were not as serious as those identified in previous years.
The findings, which the Fed said reflected “significant progress”, cap a year of regulatory wins for the industry that have helped push shares in S&P 500 banks up by a fifth in 2017 to record highs. Higher interest rates and tax cuts that are on the brink of becoming law this week have also fuelled the rally.
The living will regime, a central pillar of the Dodd-Frank reforms introduced after the Lehman crisis, is aimed at improving the safety and soundness of the financial system and avoiding the need for government bailouts. Regulators have powers to force banks to shed chunks of their business if they persistently fail to meet the required standard.
Last year, only Citigroup received an entirely passing grade. Then, the two regulators ruled that five banks’ living wills had “deficiencies”, meaning they were “not credible, or would not facilitate an orderly resolution”.
One of those five, Wells Fargo, failed to fix the problems, prompting watchdogs to place restrictions on its business, although these have since been lifted.
This year, none of the plans had “deficiencies”. Four banks — Citi, JPMorgan Chase, State Street and Bank of New York Mellon — got the all clear. The others have been told that their subsequent submissions require “additional work”.
The Fed has signalled it is open to letting banks submit their resolution plans every two years, instead of annually.