Date
23 July 2017
Bank of America is among those that were deemed not to have credible plans for bankruptcy that would not rely on taxpayer money. Photo: Bloomberg
Bank of America is among those that were deemed not to have credible plans for bankruptcy that would not rely on taxpayer money. Photo: Bloomberg

Five major US banks fail ‘living will’ test

US regulators gave failing grade to five big banks in relation to their ability to wind down operations during a crisis without seeking taxpayer money.

The banks — JPMorgan Chase, Wells Fargo, Bank of America, State Street Corp., and Bank of New York Mellon – have been given until Oct. 1 to make amends or risk sanctions, Reuters reported.

The move comes amid an ongoing debate, sparked by the 2007-2009 financial crisis, about banks being “too big to fail”.

The banks failed for reasons ranging from the way liquidity would be housed and shuffled among domestic and foreign subsidiaries to the manner in which executives would communicate problems as they arose during a crisis, the report said.

Wednesday’s announcement was the first time the two major banking regulators, the Federal Reserve and the Federal Deposit Insurance Corporation, issued joint determinations flunking banks’ plans, commonly called “living wills.”

If the five banks do not correct serious “deficiencies” in their plans by October, they could face stricter regulations, like higher capital requirements or limits on business activities.

If the deficiencies persist for two years, the lenders will have to divest their assets.

The requirement for a living will was part of the Dodd-Frank Wall Street reform legislation passed in the wake of the financial crisis, when the US government spent billions of dollars on bailouts to keep big banks from failing and wrecking the US economy.

The plans are separate from the Fed’s stress tests, where banks demonstrate stability by showing how they would withstand economic shocks in hypothetical scenarios.

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