Pete Schroeder
WASHINGTON (Reuters) – U.S. banking regulators on Friday ordered Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase to strengthen their bankruptcy protection plans, with the Federal Deposit Insurance Corp (FDIC) raising concerns about Citi’s plan.
Specifically, the Federal Reserve and the Federal Deposit Insurance Corp. said banks will need to revise their so-called living wills to show how they would safely unwind their derivatives portfolios when they next submit plans to regulators in 2025.
Big banks hold derivatives worth trillions of dollars in notional value, and any changes to the way they manage the risk, liquidity and contingent liabilities in those portfolios could be very costly.
The banks are due to detail in September how they plan to address the previously undisclosed deficiencies. Bank of America did not immediately comment. JPMorgan and Goldman Sachs declined to comment.
“The Fed is pushing banks to get these wills done properly,” said Christopher Marinak, research director at Janney Montgomery Scott & Co. “This just shows that the Fed isn’t happy with the end result, and there’s still work to be done.”
City’s flaws
The FDIC also escalated its concerns about Citi’s plan to “deficient,” meaning regulators found it credible but the Fed didn’t follow suit. If both regulators find Citi’s plan deficient, the company would have to resubmit an improved plan and could face additional regulation. Reuters previously reported that the FDIC would find the plan deficient.
Disagreement among regulators over the severity of Citi’s failures means the bank is under pressure to make improvements but is not at risk of a forced sale, TD Cowen analyst Jarrett Seiberg said in a note.
After the 2007-2009 financial crisis, big banks were ordered to periodically submit resolution plans to regulators detailing how they could be safely liquidated without needing government assistance. These plans are assessed by regulators for their credibility and feasibility.
Nearly all of the big banks have faced some level of regulatory criticism over their living wills and have been ordered to tighten their plans. In 2016, for example, regulators found the roadmaps of Bank of America, BNY, JPMorgan Chase, State Street, and Wells Fargo to be flawed, and cited deficiencies at Goldman Sachs and Morgan Stanley.
Banks can usually address these concerns by filing amended documentation.
In a letter to Citi, regulators said weaknesses in the firm’s data and controls contributed to inaccurate calculations of the liquidity and capital needed to unwind derivatives positions.
The issues relate to problems identified in the living wills of 2021, according to the regulator. The regulator also instructed the banks to show “independent confirmation” when submitting their 2025 plans that the issues have been addressed, controls are working and the results are reliable.
Regulators also asked Citi to outline a resolution plan for its operations outside the United States.
Citi has been working for years to address regulatory concerns over its data management, and Reuters reported in February that the bank had received new regulatory direction to resolve the issues in the second half of 2023.
“We are committed to addressing the issues raised by regulators,” Citi said in a statement. “We have made significant progress on our reforms, but recognize we need to accelerate our work in certain areas, including improving data quality and regulatory processes.”
“We remain confident that the City can resolve this without negatively impacting the system as a whole and without the need to incur taxpayer resources,” the company said.
Shares in JPMorgan, Bank of America, Goldman Sachs and Citigroup were all down about 1% in afternoon trading.
They also said banks’ next submissions must address contingency plans and obtaining foreign government action needed to implement them, in an apparent nod to the difficulties regulators faced safely unwinding Credit Suisse after it collapsed last year.
Instead of executing the will, Swiss authorities engineered a takeover of Credit Suisse by UBS, raising questions about the flaws in such a settlement plan.
Regulators found no problems with the plans submitted by Wells Fargo, Bank of New York Mellon, State Street and Morgan Stanley.
(Reporting by Pete Schroeder, Saeed Azar, Tatyana Bautzer and Lanang Nguyen; Additional reporting by Sinead Carew; Editing by Chiz Nomiyama and Rod Nickel)
