Big Banks Fail to Give Regulators Plans to Manage Next Collapse

April 19th, 2016

Awake Goy

JPMorgan Chase, Bank of America, Wells Fargo, Bank of New York Mellon and State Street Bank were cited by the Federal Reserve and the Federal Deposit Insurance Corp. for “living wills” that are “not credible” or insufficient for an orderly restructuring if needed. The banks were required to submit the plans outlining how they would reshape themselves in the event of failure.

The government exercise is aimed at avoiding a repeat of the taxpayer bailouts of “too-big-to-fail” banks during the 2008 financial crisis. Having to salt away bigger capital reserves against unforeseen losses could eventually cut into banks’ profitability. They might try to compensate by pinching consumers with higher fees for services.

But for now, the regulators’ thumbs-down represents merely a ripple for a mostly robust U.S. banking industry. They wouldn’t face any government sanctions, such as new capital-building mandates or forced sales of assets, for at least six months.

The five banks, with a total of about $5.6 trillion in assets, were among eight Wall Street behemoths whose plans were evaluated. The other three banks — Citigroup, Goldman Sachs and Morgan Stanley — got less-than-glowing reports from the regulators, though not as severe.

The big banks have been working on their plans for four years. The regulators already put them on notice in mid-2014 that they had to correct serious deficiencies.

The regulators gave them an Oct. 1 deadline to fix the problems or face possible “more stringent” requirements. That could include ordering the banks to beef up their capital cushions against unforeseen losses. If the regulators still weren’t satisfied, banks eventually could be forced to sell off assets — but not before two years.

That helps explain why Wall Street seemed unruffled by news of the regulators’ action, and stocks of major banks rose in U.S. trading after the announcement by the agencies. They closed moderately higher. JPMorgan gained 4.5 percent to finish at $61.94. Bank of America picked up 3.7 percent to $13.76.

Investors view the banks’ shortcomings in their “living wills” mainly as a housekeeping problem rather than a sign of fundamental financial weakness.

The big banks are in strong financial shape and are facing no threat of collapse. They sit on sturdy bases of capital that the regulators ordered them to shore up in recent years. The banking industry as a whole has recovered steadily since the financial crisis, racking up climbing quarterly profits.

At the same time, it’s been a tough slog for big banks in recent months. Profits and share prices have fallen as their loans to energy companies have soured and the Fed signaled it will slow the pace of interest rate increases, which hurts bank profits. The financial industry is the worst performing sector of the S&P 500 this year.

The “living will” assessments are part of the regulators’ effort to avoid another taxpayer bailout of Wall Street banks in a crisis and to end the marketplace perception that the government would step in and rescue them. Under the 2010 overhaul law, the FDIC has the authority to seize and dismantle big financial firms that could collapse and threaten the broader system. The banks’ “living wills” could serve as guidelines for possible breakups by the government.

“We are going to do everything we can to fix this issue,” JPMorgan CEO Jamie Dimon said in a conference call with reporters.

The biggest U.S. bank, with some $2 trillion in assets, reported Wednesday that its first-quarter profit fell more than 8 percent from a year earlier, hurt by weak performance in its investment business. Still, the earnings came in better than analysts had expected, and JPMorgan’s stock advanced.

Any potential breakup of JPMorgan would be at least two years away, if regulators continued to find the bank’s plan to be deficient. And any capital that JPMorgan, or the other banks, would have to raise to meet the regulators’ demands would also be at least six months away. In a conference call with investors, JPMorgan’s finance chief Marianne Lake said any costs tied to meeting regulators’ requirements would likely be modest.

Complex legal structures are a big factor in the problems the regulators had with the banks’ plans. JPMorgan’s plan, for example, relies on moving cash and holdings away from its overseas subsidiaries, a feat that could be difficult in a global financial crisis.