First wave of U.S. “living wills” provides a blueprint for the industry

July 2, 2012

By Bora Yagiz

NEW YORK, July 2 (Thomson Reuters Accelus) – The biggest U.S. banks and foreign banks with U.S. operations will show regulators and the world this week how they are not “too big to fail.”

On Monday U.S. bank holding companies with $250 billion or more in total nonbank assets and foreign-based bank holding companies with $250 billion or more in total U.S. nonbank assets are due to submit resolution plans, known as the “living wills” to the Federal Reserve and Federal Deposit Insurance Corp. The first wave of submissions will include five of the biggest US banks, namely, JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley.

Summarized public versions of the resolution plans are due to be released by Tuesday.

Unlike the majority of rules in the Dodd-Frank Act that focus on avoiding the failure of a systemically important financial institution, living wills are after-the-fact in nature. Specifically, the living wills are intended to provide roadmaps for regulators for the orderly unwinding of firms without spillover effects onto other parts of the economy and without costly bailouts. Along with a related component — the recovery plans designed to maintain firms under extreme stress as a going concern — the living wills form Title II of the Dodd-Frank Act.

A rule issued in September 2011 jointly by the Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC) has provided some general guidance on the required content for the plans. Accordingly, the firms will have to provide a detailed account of their business lines and legal entities, information systems, capital and cash flows and an analysis explaining resolution options. The specifics, however, will be ironed out in the future.

The rule will allow FDIC and the Federal Reserve to impose various restrictions on capital, leverage, or liquidity of the firm if the living wills are found to be deficient or non-credible. When warranted, the regulators will even be able to curtail the firm’s operations, and require divestiture of assets, though FDIC made clear that this route would only be taken as the last resort.

The first wave of submission, then, rather than shaping definite lines around potential resolution options, will provide the blueprint for successive waves of submissions through subsequent discussions between regulators and firms.

Most importantly, they will allow regulators to demystify the firms’ legal structures and business lines.

Seen in a positive light, the rules could provide a chance for firms to streamline their complex corporate structures and enhance their risk management systems on a real-time basis, allowing their senior managements to be informed of time sensitive risk measures such as counterparty exposures, amount and quality of collateral and collateral arrangements.

A Goldman Sachs officer, unwilling to be identified, declined to comment on the firm’s living will and cited orders not to discuss the issue with the press.  Goldman Sachs spokesperson David Wells said that the firm has well-established risk and conservative liquidity management practices in place, and its plan follows the assumptions set by the regulators providing a process to enable an orderly resolution of Goldman Sachs Group.



(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. <a href=” ions/regulatory-intelligence/compliance- complete/” target=_new”>Compliance Complete</a> provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)

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