Regulators told three banks Monday that they need better plans for going bankrupt in an emergency without sparking a financial crisis.
The Federal Reserve and the Federal Deposit Insurance Corporation said Monday that they had rejected the “living wills” of the French bank BNP Paribas, London-based HSBC and the Royal Bank of Scotland.
Living wills, implemented by the 2010 Dodd-Frank financial reform law, require big banks to spell out their plans for shuttering their businesses without sparking confusion and panic throughout the financial system and to update those plans annually. They are intended to prevent episodes like the disorderly collapse of the investment bank Lehman Brothers in fall 2008.
The Fed and Federal Deposit Insurance Corporation announced Monday that the three foreign banks’ 2014 living wills contained “specific shortcomings.”
The regulators did not disclose what the exact problems were, but said that the banks relied on “[u]nrealistic or inadequately supported assumptions” about the likely behavior of customers, investors, regulators and others during an emergency, and that they had inadequate analysis of how they are interconnected to other financial firms.
The Federal Deposit Insurance Corporation called the living wills “not credible,” a term that connotes possible regulatory action.
The Fed simply said the banks “must take immediate action” to improve them.
The regulators warned of further consequences if the banks did not improve the living wills in the 2015 plans, due Dec. 31.
Under the law, regulators have the power to demand higher capital ratios at firms that fail to present corrected living wills after receiving feedback. If a bank doesn’t improve over a period of feedback, ultimately the regulators could break it up.
Last summer, the two regulatory agencies rejected the living wills of 11 other banks, including some of the biggest U.S. banks, such as Bank of America and Goldman Sachs.
Some critics of Wall Street practices have pointed to the rejection of the living wills as evidence that banks are “too big to fail.”
“The too-big-to-fail banks have grown bigger than ever and banks take on new kinds of risks every day,” Sen. Elizabeth Warren, D-Mass., said during congressional testimony last week. “Just last summer, the Fed and the FDIC declared that any — if any one of 11 banks started to falter, they would require a taxpayer bailout to avoid bringing down the entire financial system.”
Those banks face a July deadline to submit a new round of living wills addressing the regulators’ criticisms. Not only must the plans update the wills, they also have to simplify their businesses and streamline their legal structures, in many cases, to meet regulators’ demands.
