U.S. Banks Present Industry-Led Crisis Plan To Federal Reserve

U.S. Banks Present Industry-Led Crisis Plan To Federal Reserve
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U.S.banks reportedly presented the Federal Reserve with a bail-in plan to pay for large bank’s restructuring in the event of a future crisis, The Wall Street Journal reports.

U.S. Banks Present Industry-Led Crisis Plan To Federal Reserve

According to a report filed by Dan Fitzpatrick, Shayndi Raice and Michael R. Crittenden for The Wall Street Journal, the plan was presented to the U.S. Federal Reserve in an attempt to preempt tougher rules from the regulators.

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The private meeting was reportedly attended by officials from Wells Fargo & Company (NYSE:WFC), Bank of America Corp (NYSE:BAC), Citigroup Inc. (NYSE:C) and several other banks.

Bail-in Mechanism

The bail-in mechanism would be designed to place a greater burden on creditors, as opposed to the tax payers, in the event of a bank’s collapse.

Last week, a similar scenario occurred wherein the UK’s Co-operative bank unveiled a rescue package to plug the £1.5 billion hole in its balance sheet. The historic rescue deal to raise £1.5 billion will force the bank’s bondholders to take losses on the investment.

The proposal presented to Federal Reserve officials would involve the largest financial-services holding companies would be willing to hold a certain amount of debt and equity which would be used to prop up any failed bank subsidiary seized by regulators.

The U.S. regulators however, haven’t responded to the banks’ proposal and might stick to their own plan.

The U.S. regulators believe banks still could pose a threat to financial stability in a crisis. Their plan involves more aggressive measures including capping bank-size, breaking-up institutions or forcing banks to take on more long-term debt.

U.S.Banks’ Proposition

Banks’ proposal to Federal Reserve involves each bank would hold a combined debt and equity equal to 14 percent of its risk-weighted assets. However, large banks could be asked to hold a higher percentage between 15 percent and 16.5 percent.

According to Goldman Sachs Group, Inc. (NYSE:GS) estimates, Wells Fargo & Company (NYSE:WFC) holds a ratio of existing debt and equity of 14 percent, while Morgan Stanley (NYSE:MS) has 40.6 percent. Besides, JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp (NYSE:BAC) and Citigroup Inc. (NYSE:C) respectively hold 18.4 percent, 20.2 percent and 22.1 percent.

However, banks’ proposal doesn’t contain specific recommendations on how much long-term debt each banking institution would hold.

Some banks such as Wells Fargo & Company (NYSE:WFC) have resisted the idea of holding more unsecured long-term debt as they are expensive to issue and carry higher interest rates to reflect higher credit risk that creditors carry in such debts. Besides, with the 10-year treasury yield rising 86 bps since the start of May, the cost of such long-term debt would only increase.

U.S. Officials Might Finalize Their Version Soon

According to The Wall Street report, U.S. officials are expected to finalize the U.S. version of international capital standards within the next month.

As reported earlier, the Federal Reserve and Federal Deposit Insurance Corp are weighing the idea of doubling the capital requirement to 6 percent of total assets for the biggest banks in the U.S., regardless of their risk.

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