Big banks have not demonstrated that they are capable of failing without a bailout from the government, a group of federal government researchers said Wednesday, backing up regulators’ decision this spring to reject the “living wills” of five megabanks.
The Office of Financial Research, a new agency within the Treasury, released an analysis concluding that the eight U.S. banks identified as “globally systemic” also have not demonstrated that they are becoming less complex and interconnected.
The analysis concerns the public parts of the living wills submitted by the banks to regulators. The living wills are required documents spelling out in advance how the banks would plan to go bankrupt in a failure without needing a bailout or sparking a financial crisis.
In April, however, banking regulators warned most of the banks that the plans were not credible, a gesture interpreted by critics to mean that the banks remain “too big to fail” even after the 2010 financial reform law.
The Office of Financial Research finds that, in the portions of the living wills available to the public, there is not sufficient information to say that the banks could go through bankruptcy “without extraordinary government support.”
That largely backs up the regulators’ determinations, although at least one top regulator has said that a megabank failure would not entail a crisis or bailout because regulators could use the resolution mechanism created by the 2010 Dodd-Frank law to safely wind down the bank even if a bankruptcy were not feasible.
The analysis also concludes that the public parts of the living wills “show that the largest U.S. bank holding companies have not reduced either their complexity or their interconnectedness.”
Very few changes have been made at the banks to streamline their operations and lines of business, according to the analysis of the living wills.
Using a different data set, the researchers found that the megabanks remain enormously complex: Most subsidiary companies within megabanks are four to six corporate layers below the parent company, and some are as many as 20 below. JPMorgan Chase, the largest U.S. bank, has more than 2,500 legal entities.
One note is that the analysis applies only to the portions of the living wills that are released to the public. Regulators at the Federal Reserve and Federal Deposit Insurance Corporation have access to far more comprehensive information.
Under the Dodd-Frank law, banks are supposed to work with regulators to improve their living wills and demonstrate their ability to go bankrupt if necessary. If they fail to do so after an extended period, they face regulatory consequences.
