US regulators criticize big-bank living wills; FDIC escalates Citi worries

US regulators have scrutinized the living wills of major banks, finding deficiencies in their contingency plans for potential financial distress. The Federal Deposit Insurance Corporation (FDIC) has expressed heightened concerns, particularly focusing on Citibank's preparedness. This scrutiny underscores ongoing efforts to ensure banks can effectively manage and mitigate risks, aiming to enhance stability in the financial system.

Boston Brand Media brings you the latest news - In Washington on June 21, U.S. bank regulators instructed Bank of America, Citigroup, Goldman Sachs, and JPMorgan Chase to enhance their strategies for orderly bankruptcy resolution. The Federal Reserve and Federal Deposit Insurance Corporation emphasized that the banks must revise their "living wills" to better demonstrate the safe unwinding of their derivatives portfolios by their next submission in 2025. Additionally, the FDIC heightened its concerns specifically regarding Citigroup's current plan.

Major banks manage derivatives portfolios valued in trillions, and any adjustments to risk, liquidity, or contingent liabilities could incur significant costs. They must now outline plans to address these newly identified deficiencies by September. Bank of America did not respond immediately for comment. JPMorgan and Goldman Sachs declined to provide comments on the matter.

"The Fed is pushing for precise adjustments to these wills," remarked Christopher Marinac, director of research at Janney Montgomery Scott. "Today's announcement indicates the Fed's dissatisfaction with the current outcomes and underscores the ongoing need for further refinement."

CITI DEFICIENCY

The FDIC raised its concerns about Citibank's plan to a "deficiency," indicating the regulator deemed it not credible. However, the Federal Reserve did not reach the same conclusion. Had both regulators found Citibank's plan deficient, Citibank would have needed to submit a revised plan and possibly faced further regulatory constraints. Earlier reports from Reuters had anticipated the FDIC's issuance of the deficiency notice.

According to TD Cowen analyst Jaret Seiberg, the disagreement among regulators regarding the seriousness of Citibank's deficiencies means the bank must make improvements but is not currently facing mandatory divestitures. Since the financial crisis of 2007-2009, major banks have been mandated to submit periodic resolution plans outlining how they could be unwound safely without needing government support. Regulators evaluate these plans for their credibility and practicality.

In recent years, nearly all major banks have faced regulatory critiques on their living wills, resulting in orders to strengthen their plans. For instance, Bank of America, BNY Mellon, JPMorgan Chase, State Street, and Wells Fargo had deficiencies flagged in their 2016 resolution plans, with Goldman Sachs and Morgan Stanley also noted for shortcomings. Banks typically address these concerns by submitting revised documents.

Boston Brand Media also found that, specifically addressing Citibank, regulators highlighted weaknesses in data management and controls that led to inaccuracies in calculating liquidity and capital requirements for unwinding derivatives positions, issues first identified in their 2021 living will. Citibank was instructed to provide independent verification of resolution readiness and detail international operation resolution plans in their 2025 submission.

Despite ongoing regulatory scrutiny, Citibank expressed commitment to resolving identified issues and improving data quality and regulatory processes. They maintained confidence in their ability to be resolved without systemic impact or taxpayer funds. The market response saw minor declines in JPMorgan, Bank of America, Goldman Sachs, and Citigroup stocks.

Looking ahead, regulators emphasized the importance of contingency planning and securing foreign government cooperation in future resolution plans, referencing challenges encountered in the Credit Suisse collapse. They did not find issues with the plans of Wells Fargo, BNY Mellon, State Street, or Morgan Stanley.

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Source: Reuters‍