Rosalind Evans
Banking regulators have identified significant issues in the resolution plans of four of the most prominent American lenders, casting a spotlight on the preparedness of these institutions to handle potential financial distress.
Unpacking the Findings: Living Wills Under Scrutiny
On Friday, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) disclosed that the living wills submitted by Citigroup, JPMorgan Chase, Goldman Sachs, and Bank of America in 2023 were found to be lacking. Living wills are crucial regulatory documents that outline how these financial giants would manage their unwinding process in a crisis.
Derivatives Portfolios: A Common Weakness
The regulators highlighted a significant concern regarding the banks’ plans to unwind their extensive derivatives portfolios. Derivatives, financial contracts linked to assets like stocks, bonds, and interest rates, pose a complex challenge during unwinding.
An example of this issue was evident with Citigroup. When regulators tested Citigroup’s ability to unwind its contracts using scenarios different from those planned by the bank, Citigroup fell short. The regulators noted, “An assessment of the covered company’s capability to unwind its derivatives portfolio under conditions that differ from those specified in the 2023 plan revealed that the firm’s capabilities have material limitations.”
The Importance of Living Wills
Legally mandated after the 2008 global financial crisis, living wills are an essential regulatory tool. The largest U.S. banks must submit these plans biennially, demonstrating their ability to unwind credibly without jeopardizing the financial system. Subsequent submissions must address identified weaknesses, with the next round due in 2025.
Severity of Shortcomings and Deficiencies
While JPMorgan Chase, Goldman Sachs, and Bank of America’s plans were deemed “shortcomings,” Citigroup faced a more severe “deficiency,” according to the FDIC. This classification indicates that Citigroup’s plan would not ensure an orderly resolution under the U.S. bankruptcy code. However, the Federal Reserve did not fully agree with the FDIC’s assessment, resulting in an overall “shortcoming” grade for Citigroup.
Citigroup’s Response and Commitment
In response to the regulators’ findings, Citigroup expressed its commitment to addressing the identified issues. “We are fully committed to addressing the issues identified by our regulators,” stated the bank based in New York. Acknowledging the need for accelerated efforts, Citigroup added, “While we’ve made substantial progress on our transformation, we’ve acknowledged that we have had to accelerate our work in certain areas.”
Despite the highlighted shortcomings, Citigroup remains confident in its resolution capabilities. “More broadly, we continue to have confidence that Citi could be resolved without an adverse systemic impact or the need for taxpayer funds,” the bank asserted.
The Path to Compliance
The Federal Reserve and the FDIC findings are a critical reminder for these financial institutions to bolster their resolution strategies. With the next set of living will submissions due in 2025, banks must take immediate and effective actions to address the identified weaknesses.
Ensuring Financial Stability
Banking regulators scrutinize living wills as an essential process to ensure the stability and resilience of the financial system. As these significant banks work towards rectifying their shortcomings, it underscores the ongoing efforts required to safeguard against future economic crises.
