Top banks say they are not too big to failBusiness Desk
Nine of the largest global banks on Tuesday expressed confidence they can be salvaged or dismantled without taxpayer bailouts if they became insolvent, as US regulators released public portions of these banks’ ‘living wills’.
The documents, required by the 2010 Dodd-Frank financial reform law, aim to end too-big-to-fail bailouts by mapping out ways that, in theory, mortally-wounded banks could go out of business without wrecking the financial system, reports Reuters.
If regulators find that the resolution plans are not credible, they could force the banks to sell off business lines and restructure to become less complex.
But some experts doubt how hard regulators will push the banks for changes or how useful hypothetical resolution plans will be in major financial crisis.
The public portions released on Tuesday and are a few dozen pages per bank summarising thousands of pages submitted confidentially to regulators.
The banks argued in the public documents that their resolution plans will work, with no cost to taxpayers or great consequence to the financial system. They used technical generalities in their conclusions without specifically addressing the unpredictable and vicious nature of a credit crisis.
Bank of America Corp, for example, said in its plan that ‘certain assets and liabilities would be transferred to a bridge bank that would, subject to certain assumptions, emerge from resolution as a viable going concern.’
JPMorgan Chase & Co concluded that its plan ‘would not require extraordinary government support, and would not result in losses being borne by the US government.’ And, Goldman Sachs Group Inc said it would find a broad range of potential buyers for its assets, including global financial institutions, private equity funds, insurance companies or sovereign wealth funds.
The other banks which submitted wills were Barclays, Citigroup, Credit Suisse, Deutsche Bank, Morgan Stanley and UBS.
The Federal Reserve and Federal Deposit Insurance Corp released the plans without commenting on them.
Other large banks will have until July and December of next year to hand in their plans, according to the FDIC. Eventually about 125 banks are expected to submit plans.
The first plans come almost four years after the financial crisis unleashed a panic in which no institution seemed safe from a bank run and markets withdrew credit in what appeared to be inexplicable fashion. The US government, in quick order, arranged a fire sale of investment bank Bear Stearns to JPMorgan and then allowed Lehman Brothers to fail, touching off a global market meltdown. Blanket government guarantees for the financial system and a $700 billion taxpayer bailout followed to ease the panic.
The disclosures on Tuesday give a glimpse of the kind of the kind of interconnections and complicated corporate structures that could still make governments fear letting big banks fail.
JPMorgan named 25 ‘material’ legal entities and 30 ‘core business lines,’ as required by Dodd-Frank and listed 18 clearing or financial settlement systems in which it is a member or participant, half of which are outside of the United States.
The full-length plans are believed to include the most comprehensive maps of the insides of bank holding companies ever created. They are intended to give regulators confidence that they understand enough of the consequences of bank failures to allow more to happen.
Bert Ely, a banking consultant in Alexandria, Virginia, said he is sceptical that the overall process could work because there would likely be a lot of turmoil in the markets when the plans were needed, raising doubt about who might buy any assets.
‘The presumption of a one-off event is not realistically valid,’ he said. ‘You can have one company blow itself up, but more often than not there are systemic problems.’
Banks emphasized that they did not believe the resolution plans would ever have to be used. Morgan Stanley said that its ‘hypothetical failure’ would have to be caused by ‘an idiosyncratic stress’ that might occur while the economy and financial markets are under severe stress.
Guggenheim Partners financial policy analyst Jaret Seiberg said he doubts regulators will use their reviews of the plans to force big changes on the institutions.
‘Our initial review suggests there is little real risk that regulators could reject one of these plans,’ Seiberg said in a note. ‘That is important because regulators could break up a financial firm that fails to submit a credible plan.’
The regulators plan to give feedback to the banks on the initial plans by September.
Congress called for the plans in Dodd-Frank to ease concerns that some banks are so big and interconnected that taxpayers will inevitably bail them out to avoid a threat to global markets.
The FDIC gained new powers in Dodd-Frank to use the plans to dismantle failing financial giants if the bankruptcy process would not work.
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