Big Banks' 'Living Wills' Released


The Federal Deposit Insurance Corp. (:FDIC) and the Federal Reserve partially released the so-called ‘living wills’ of the nine major global banking giants. Under the provisions of the Dodd-Frank Act, the banks were required to outline the ways to liquidate by breaking up and selling off assets if they are on the verge of collapse.

The nine global banks that submitted resolution plans or the professed ‘living wills’ are Goldman Sachs Group Inc. (GS), Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Morgan Stanley (MS), Barclays PLC (BCS), Deutsche Bank AG (DB), Credit Suisse Group (CS) and UBS AG (UBS). Further, by the end of next year, more than 100 banks will be submitting their resolution plans to the regulators.

A Brief Synopsis of Individual Living Wills

The details released by the regulators in the public domain revealed quite a few facts that are already recorded by the banks while filing their annual and quarterly reports with the Securities and Exchange Commission (:SEC).

Amid a financial crisis, Bank of America, Goldman Sachs and Credit Suisse plan to sell off their respective assets to a wide range of buyers -- national, international and regional financial institutions, hedge and private equity funds along with other financial asset buyers and other banks. However, UBS concluded that only large firms would be able to purchase its businesses in the event of a collapse.

In its resolution plan, JPMorgan provided some procedures for systematic dismantling of its businesses that would eliminate every systematic risk to the financial system. Another U.S. banking giant with international operations, Citigroup, stated that it would separate its banking unit from other operations and then will file for a bankruptcy while disposing off other operations. In the meantime, its banking unit – Citibank NA – will continue to function as a banking institution.

Likewise, Morgan Stanley, Barclays and Deutsche Bank summed up their resolutions of selling assets and unrelated operations in case they fail. Overall, all the banks concluded that if they are on the brink of failure, the taxpayer money will not be required to revive them.

Purpose of ‘Living Wills’

The main idea behind the submission of living wills is to avoid re-run of the 2008 financial crisis, the period when Lehman Brothers Inc. went down. The living wills are required in a bid to reduce the risks of further bailouts, if these banks sink in the event of another financial crisis.

A systemic resolution would make it easier for the regulator to address bank failures efficiently, maximizing the sale value of a failed bank and minimizing creditor losses. Moreover, the FDIC will have the power to liquidate a bank if its collapse knocks down the country’s financial stability.

Last year, the FDIC mandated all large banks of the nation, with assets of at least $50 billion, to submit living wills effective January 1, 2012. Additionally, the dates for filing the wills extended to July 1, 2012 for institutions with more than $250 billion in non-bank assets and July 1, 2013 for institutions with non-bank assets between $100 billion and $250 billion.

Moreover, this is not a one-time affair. Banks will be required to submit the living wills on a yearly basis.

Will ‘Living Wills’ Serve its Purpose?

As per the arrangement, the markets will continue to function normally even if these big banks collapse. Additionally, there would be buyers who will readily make large acquisitions without any government bailout. However, there was no such arrangement when financial giants like Lehman Brothers, Washington Mutual and Bear Stearns Co. collapsed in 2008.

However, since almost all banks are dependent on each others’ businesses, if even one of these collapse, there would be rippling effects on the overall financial market. As a result, there will be limited number of healthy financial institutions to buy assets from the weaker ones. So, the outcome will not change to a great extent.

However, living wills will hopefully prevent big banks from messing around with risky activities that jeopardize general economic health. Most importantly, the advance precautions would ultimately translate into less involvement of taxpayers’ money for bailing out troubled financial institutions.

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