On April 13 2016, the ‘living wills’ of five big banks were found ‘not credible’ by the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC). ‘Living wills’ are resolution plans to exhibit that banks will not spread financial contagion to other banks and cause a financial crisis. It allows a bank to outline its bankruptcy procedures in an orderly fashion in an event of a financial failure. According to Bloomberg, in a statement, Hillary Clinton had stressed that the financial regulators should take action against big banks that do not have credible plans that under the US Bankruptcy Code.
The five banks that have failed to provide reliable resolution plans were JP Morgan , Wells Fargo, Bank of America Corp., State Street Corp. and Bank of New York Mellon Corp. The banks have been given a deadline of October 1 2016, to redesign a ‘living will’ that adheres to the U.S. Bankruptcy Code, failing which they may face ‘stringent prudential requirements’ by regulatory authorities. These strict requirements may include higher capital requirements or limitations on business activities.
‘Living Will’ forms a crucial part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act and includes bank holding companies with total consolidated assets of $50 billion or more and nonbank financial companies designated by the Financial Stability Oversight Council (FSOC).
The failing grade to comply with the standards of ‘living wills’ comes a week after JPMorgan chief executive, Jamie Dimon mentioned in a 50-page letter to the shareholders, that JPMorgan held enough capital to absorb “all the losses, assumed by CCAR, of the 31 largest banks in the United States”. CCAR is Comprehensive Capital Analysis and Review (CCAR) are commonly known as ‘Stress tests, which are conducted to check that big banks have sufficient capital to fall back on incase of unfavorable economic scenarios. Living wills are independent of the Fed’s stress tests, where banks display stability in hypothetical scenarios.
The failing grades of big banks have strengthened the existing belief that the nation’s biggest banks remain risky in case of a financial collapse.