Insight: Washington delays big banks from writing wills before a collapse

Wed May 7, 2014 3:34pm EDT
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By Douwe Miedema and Emily Stephenson

WASHINGTON (Reuters) - Almost six years after Lehman Brothers collapsed, U.S. regulators still haven't given Wall Street banks individual feedback on how to improve so-called "living wills" that detail how to go bankrupt without spending taxpayer dollars or causing a market panic.

The banks have already had to submit two versions of the documents, neither of which were up to the standards of the Federal Deposit Insurance Corp and the Federal Reserve. With the next draft of the documents due in July, banks say they can do little to improve the plans if there are no detailed instructions from the government, sources familiar with the process say.

Some regulators say that the plans submitted so far by the banks wouldn't provide much of a roadmap if a new crisis were to threaten a large bank today.

"I don't think they'd function very well at all," FDIC Vice Chairman Thomas Hoenig told Reuters last week. "What's different today than in 2008? ... We still have major exposures from a systemic consequence point of view, and if I were to say otherwise I wouldn't be doing my duty."

Banks may not hear back from the government in time for the July deadline. Regulators haven't decided whether they will give feedback by that time, though they hope to get something to banks "soon," said Arthur Murton, the FDIC official who heads the living wills process.

"It's all moving in the right direction," Murton told Reuters in an interview. "A year from now we'll be even better positioned."

The 2010 Dodd-Frank law requires banks with more than $50 billion of assets, including JPMorgan Chase & Co JPM.N and Goldman Sachs Group Inc GS.N, to submit annual living wills that describe how they could be unwound in a bankruptcy process.

Under the law, regulators could eventually tell banks to shrink or spin off parts of their business if they are not convinced the living wills would do their job. However, they won't likely give such orders until after they have advised the banks individually about shortcomings in the living wills.   Continued...

FDIC Vice Chair Thomas Hoenig testifies before the House Financial Services Committee hearing on "Examining How the Dodd-Frank Act Could Result in More Taxpayer-Funded Bailouts" on Capitol Hill in Washington June 26, 2013. REUTERS/Yuri Gripas