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Living Wills Because the Banks Won’t

Yesterday, the Fed and the FDIC found that the “living wills” submitted by five of the nation’s largest banks—JPMorgan Chase, Bank of America, Wells Fargo, Bank of New York Mellon and State Street—failed to show that they could be safely unwound in a bankruptcy proceeding , and deemed their plans “not credible.”  As FDIC Vice Chairman Tom Hoenig put it bluntly:  “no firm yet shows itself capable of being resolved in an orderly fashion through bankruptcy.  Thus, the goal to end too big to fail and protect the American taxpayer by ending bailouts remains just that: only a goal.”

These “living wills” are the first line of defense in protecting the American people from the catastrophic failure of one of these firms.  And even though the regulators stopped short of flunking them, the regulators found that Goldman Sachs, Morgan Stanley, and Citigroup all had problems with their “living wills” that these banks will have to address.  In other words, the regulators found that these banks continue to threaten the financial stability of the United States.

This is not the first time the regulators have warned us about the persistence of “too big to fail.”  In August 2014, the Fed and the FDIC found the “living wills” of the nation’s largest banks failed to explain how these institutions—if they failed—could be wound down in bankruptcy without either requiring a taxpayer or bailout or bringing down the global financial system.  After failing these banks, the Fed and the FDIC asked these banks to try again, and these banks submitted another round of “living wills.”  Yesterday’s announcement shows that the threat the regulators identified more than a year and a half ago still remains.

Better Markets commends the regulators for having the courage to hold these banks accountable and ensuring that these institutions can, in fact, be wound down in bankruptcy without requiring a bailout or crashing the economy.  Better Markets also commends the regulators for making more detailed guidance available to the public about the reasons that these banks’ “living wills” are deficient and what they must do to correct these shortcomings. 

Better Markets has suggested several ways in which the regulators can improve the process, and it is encouraging to see that the regulators are working to make the process more transparent and thus more credible to market participants and the public.  The regulators can and should do more to make the review process more transparent to everyone. 

But the real goal here is to ensure that these banks can be wound down in bankruptcy.  As Senator Elizabeth Warren pointed out, the fact that the regulators failed these banks shows that “that five of the country's biggest banks are still—literally—Too Big to Fail.“  That Is to say, the regulators have “officially determined that five US banks are large enough that any one of them could crash the economy again if they started to fail and were not bailed out.”  We should all be frightened.

The banks will get yet one more chance to prove to the regulators and the American people that they can be resolved in bankruptcy without requiring a lifeline from the government or causing another financial meltdown.  If the banks can’t show that they can, the next step is to regulate them even more strictly, and after that, to break these institutions up so that they are no longer “too big to fail.”

The regulators have taken one more step towards ending “too big to fail” once and for all.  As FDIC Chairman Martin Gruenberg noted, the regulators’ refusal to accept these banks’ deficient “living wills” “is a significant step” toward ending taxpayer bailouts.  Let’s hope the regulators have the courage to finish the journey.

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