They were ordered to address the deficiencies, but did not technically fail the test. The financial industry is the worst performing sector of the S&P 500 this year.
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The banks now have until October 1 to address the problems with their plans.
The Wall Street Journal reported that at least half of the eight American banks recognized as “systematically important” by the global regulators, including J.P. Morgan Chase & Co., are expected to obtain a ruthless verdict on their living wills. The agencies said they are still considering the living wills for four non-U.S. firms, including Barclays Plc, Credit Suisse Group AG, Deutsche Bank AG, and UBS Group AG. Congress, in passing the Dodd Frank Act of 2010, wanted to make it possible for banks to fail, but in an orderly way.
“We are going to do everything we can to fix this issue”, JPMorgan CEO Jamie Dimon said in a conference call with reporters. Marianne Lake, JPMorgan’s chief financial officer, added that the bank is disappointed, but it should only face a modest expense to fix the plan. The agencies’ assessments differed.
GAO has issued a report which noted the FDIC and Federal Reserve have developed separate but similar review processes for determining whether a resolution plan, often referred to as a “living will”, is “not credible” or would not facilitate a company’s orderly resolution under the Bankruptcy Code.
The agencies also found shortcomings to be fixed in Citigroup’s plan, but they didn’t rise to the “not credible” level. In recent years, the federal government has also faulted more than a dozen banks for drafting overly optimistic or not credible plans, CNBC claimed.
The exercise was mandated under the financial overhaul law enacted in the wake of the crisis that struck in 2008 and set off the Great Recession.
A “living will” refers to a bank’s plan for how it would wind down operations during a crisis without the help of public money.
“State Street, in a statement, said: “We are committed to addressing the areas outlined” by regulators by October 1, 2016, as required”. Conversely, the Fed found that Morgan Stanley’s living will was not credible, while the F.D.I.C. did not make that determination. Those are uncharted waters, because this marks the first time regulators have taken the initial step to find fault.
“We view the feedback as constructive and valuable”, San Francisco-based Wells Fargo said in a statement.
The regulators said State Street and Bank of New York Mellon need to clarify their business lines and legal entities to improve their ability to be resolved. The bank was also told that its internal structure fails to promote an easy resolution.
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This story has been corrected to show that major banks were reporting earnings for the first quarter, not fourth, this week.
