Too-Big-To-Fail Banks Offer Winding-Up Plans To Regulators

Federal regulators in the U.S. have revealed the “living wills” of nine of the world’s largest banks, reported Reuters on Tuesday, with the “wills” detailing exactly how the government should dismantle the banks in the event of a potential collapse.

Federal regulators in the U.S. have revealed the “living wills” of nine of the world’s largest banks, reported Reuters on Tuesday, with the “wills” detailing exactly how the government should dismantle the banks in the event of a potential collapse.

The documents were submitted to the U.S. Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) on or before July 2, 2012; and mapped out ways in which, in theory, banks with more than $250 billion in assets could go out of business without wrecking the financial system.

The nine banks that prepared the “wills” were Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley and UBS. According to the Associated Press, more than 100 other banks in the U.S. will be required to submit their “living wills” by the end of next year.

In a press statement last year, the U.S. Federal Reserve board said that the “wills” would allow for the “rapid and orderly resolution in bankruptcy during times of financial distress.”

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Additionally, AP claimed that the government was trying to prevent a repeat of the 2008 financial crisis where taxpayers were asked to provide bailouts to banks. At the time, regulators didn’t have rules in place to unwind banks considered “too big to fail.”

[quote]Mike Mayo, an analyst with Crédit Agricole Securities, however, told the New York Times that the ‘wills’ were “simply an exercise to make some people feel better.”[/quote]

“These are vast institutions that can’t be neatly unwound,” Mayo said, citing comparisons between the now defunct Lehman Brothers, which collapsed in 2008 with roughly $639 billion in assets and present day JPMorgan Chase, which has $2.3 trillion in assets.

Living wills are a good idea in theory, but their actual value in a real crisis would be limited, added Chris Kotowski, a longtime bank analyst with Oppenheimer.

[quote]“When a financial institution fails, it usually happens suddenly and in an unpredictable way, and someone has to write a check,” he said.[/quote]

“Nobody had the authority or resources to seize an institution like Lehman and plug the holes,” Kotowski added.

Nonetheless, the banks have insisted that their plans would work, though every single of one them emphasised that they did not believe the resolution plans would ever have to be used.

Morgan Stanley for instance said that its “hypothetical failure” could only happen if there was “an idiosyncratic stress”, while Citigroup insisted that their company was “today a fundamentally different institution than it was before the crisis.”

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Mitchell Glassman, a director at Deloitte Consulting, who worked with big banks on the “living wills”, admitted that he was impressed with how much senior executives and directors were involved in preparing the plans, but questioned whether the plans on paper would work effectively in real-life.

[quote]“Will this help Main Street? Will we be better off with this approach than we were in the last crisis?” Glassman asked.[/quote]

Read the “Living Wills” on the Federal Reserve website