Big banks that have been deemed bailout risks will receive a “full and fair” hearing before an October deadline to put their affairs in order, a top financial regulator said Wednesday.
At a press conference, Federal Deposit Insurance Corporation Chairman Martin Gruenberg addressed the banks’ “living wills,” documents spelling out the banks’ plans for going bankrupt without sparking a crisis or necessitating a bailout, and said that the megabanks that had their living wills rejected by regulators in April would have a chance to right the situation.
The regulators have tried “to lay out in some detail to them the deficiencies in their plans,” Gruenberg said, “and I think the staff of both the Fed and the FDIC will be engaging actively with the institutions as they develop their responses.”
Gruenberg declined to say that the banks would receive an all-clear signal from the two agencies.
Five banks were told by the Federal Reserve and the FDIC that their living wills were not credible, a development that places those companies in line for tougher regulations if they fail to fix the problems. Those banks are Bank of America, Bank of New York Mellon, JPMorgan Chase, State Street and Wells Fargo.
The FDIC also told Goldman Sachs that its plan wasn’t sufficient, although the Fed did not second that assessment.
To receive approval for their living wills, the banks have been asked to simplify their organizational structures, plan better for emergencies, and more clearly spell out their plans for going through the bankruptcy code.
Some critics have said that the regulators’ rejection of the megabanks’ living wills indicates that “too big to fail” is still a major problem.
For his part, Gruenberg has indicated that the megabanks could fail without creating a crisis or prompting a government bailout. But such a safe failure might involve the use of the government’s new resolution authority, rather than the bankruptcy code as intended in the living wills process.
Gruenberg made his comment while delivering a quarterly update on the banking sector. The industry, he said, had “mixed results” in the first quarter of the year, with net income down 2 percent on a yearly basis to $39 billion, the first such decline since 2014. He attributed that slowdown primarily to losses on loans to energy companies suffered by large banks, particularly regional banks exposed to drillers in the oil patch.
