Banks will face the possibility of tougher requirements, including possible higher capital standards, if they have not fixed the shortcomings in their “living wills” by October, Federal Reserve Chairwoman Janet Yellen said Tuesday.
Appearing before the Senate Banking Committee, Yelllen was quizzed about the five megabanks that were told in April that they did not have credible plans for failing without the government getting involved. She told lawmakers that she would consider higher capital requirements or other penalties if the banks fell short of an October deadline to correct the problems identified in their living wills.
“There will be consequences” if the banks don’t improve their plans, Yellen said.
The living wills, a requirement of the 2010 Dodd-Frank financial reform law, mandate that the banks spell out how they would pay out creditors and resolve themselves under the bankruptcy code in case they ran into trouble.
After several rounds of the living wills process, Yellen said, the banks have “greatly increased their ability to be resolved, in the event of trouble, by bankruptcy” or by through the government’s resolution powers.
Nevertheless, “I couldn’t guarantee at this point” that they could safely go bankrupt, she said.
“I would not say at this point that all of them are prepared for resolution under bankruptcy,” she later added.
The banks whose living wills were deemed “not credible” by the Fed and the Federal Deposit Insurance Corporation were Bank of America, Bank of New York Mellon, JPMorgan Chase, State Street and Wells Fargo.
Under the law, those banks could face escalating consequences if they do not submit credible living wills, including ultimately forced divestitures or breakups.
The industry, however, has argued that the process is supposed to be iterative, with banks given time to respond to regulators’ criticism and make the needed changes.
Wall Street critics in Congress have pushed Yellen and other regulators to accelerate that process.
Yellen’s comments Wednesday indicate that she is responsive to their entreaties, despite the “substantial advances” that she said banks have made in recent years toward safe resolution.
In questioning from Sen. Elizabeth Warren, D-Mass., Yellen said any decisions about punishing banks must be made in consultation with other Fed and FDIC staffers.
“I can’t pre-commit today to tell you precisely what our response will be …but we are extremely serious about wanting to see progress, and certainly we’ll consider using those tools,” she said.
