In accordance with the 2010 Dodd-Frank Financial Reform Law, nine of the largest global banks submitted their “living wills” to regulators including; Bank of America Corp (NYSE:BAC), Barclays Plc (NYSE:BCS), Citigroup Inc. (NYSE:C), Credit Suisse Group AG (NYSE:CS), Deutsche Bank AG (ETR:DBK) (NYSE:DB) (FRA:DBK), Goldman Sachs Group, Inc. (NYSE:GS), JPMorgan Chase & Co. (NYSE:JPM), Morgan Stanley (NYSE:MS) and UBS AG (NYSE:UBS).
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The Federal Reserve and Federal Deposit Insurance Corp disclosed some parts of the banks’ wills to the public without offering any comment. Based on the released portions of the documents, each bank has its own resolution strategy in case of financial meltdown. However, the general conclusion is that the banks may choose to recapitalize, dismember, or shutdown without cost to taxpayers and it will not provide a great damage to the financial system.
Before getting into the specific details, it must be noted that the news should be taken with a grain of salt. As the recent JPM trading loss shows, regulators and bank CEOs rarely know what is happening at their own company. Banks with trillions of dollars in assets, with branches across the globe are complex entities. It is not very simple to just wind-down a bank this size.
Back to the plan…
The document submitted by JPMorgan Chase & Co. (NYSE:JPM) assures that its “resolution plans do not require extra-ordinary government support and it would not result in losses that would be borne by the US government” while Citigroup enumerated several action plans to resolve potential systemic disruption in the United States or global financial system. Its plans do not involve any taxpayer money.
Meanwhile, Bank of America Corp (NYSE:BAC) concluded its resolution plan without anticipation that it would be successful instead the company identified several government strategies that need to be implemented such as the bankruptcy code or through the FDIC receivership.
According to regulators, they will provide feedback to the banks’ resolution plans by September. The 2010 Dodd-Frank Financial Reform Law was enacted by the Congress to ensure that massive-taxpayer funded bail-out during the 2008 financial crises will not be repeated and to alleviate concerns that the banks are too big and too complex to suffer failure.
The FDIC confirmed that it will resolution strategies submitted by the banks if it is necessary to efficiently shutdown a financial giant at risk or it might recommend major financial structural changes if a particular firm is too large to liquidate in the event of financial difficulties.