Deadline in 2012 For Banks to Set Plans on Demise
The largest U.S. banks have until next summer to provide financial regulators with a road map for liquidating the companies if they fail, the Federal Deposit Insurance Corp. said Tuesday.
These so-called "living wills" were mandated by the Dodd-Frank financial law to help regulators better understand, before a crisis occurs, the structure of complex financial firms whose failures could wreak havoc on the financial system, and to make it easier to wind them down in a crisis.
During the 2008 crisis, regulators struggled to understand the sprawling operations of teetering financial giants such as American International Group Inc. and Lehman Brothers Holdings Inc. It has taken Lehman years to develop a liquidation plan following its 2008 bankruptcy, and it will take still more years for its dismantling to be complete.
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FDIC officials also said the plans will help them and other regulators create private blueprints for how they would dismantle the firms outside normal bankruptcy procedures. Dodd-Frank gave federal regulators new authority to seize and break up a faltering megafirm if its failure under normal procedures could destabilize the broader system. Regulators say they lacked such powers in 2008.
FDIC officials said the new living-will rule, which they co-wrote with the Federal Reserve, helps end the problem of "too-big-to-fail" financial firms—those so large and intertwined with others that the government would choose to rescue them during a crisis rather than let them collapse and possibly bring down others, as well.
The FDIC's acting chairman, Martin Gruenberg, said the rules will ensure "comprehensive and coordinated resolution planning" for banks, holding companies and their affiliates. The Fed is expected to approve the rule soon.
The rule requires a living will from all bank holding companies with $50 billion or more in total world-wide assets. In total, 124 banks, nearly 100 of which are foreign banks with U.S. affiliates, must submit plans and update them regularly.
A handful of the largest U.S. bank holding companies—those with $250 billion or more in U.S. nonbank assets—must submit their initial plans by July 1, 2012. That includes Bank of America Corp. (BAC - News), J.P. Morgan Chase & Co. (JPM - News) and Citigroup Inc. (C - News). At least two foreign banks, Deutsche Bank AG (DB - News) and Barclays PLC (BCS - News), are expected to have to meet that deadline as well, given their large holdings of nonbank U.S. assets. Smaller companies will have longer to craft their plans, with all due by the end of 2013. The industry had pushed for the staggered deadlines.
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Representatives for Barclays, Citi, Deutsche Bank and J.P. Morgan declined to comment on the rules. Bank of America didn't respond to a request for comment.
Foreign banks must submit plans, too, even if they have a relatively small presence in the U.S. These firms had lobbied for an exemption if they had less than $50 billion in assets in the U.S. Regulators responded to their arguments by allowing those foreign banks with relatively few U.S.-based assets to file less-detailed plans. Smaller and less-complex U.S.-based banks are also allowed to file "tailored" living wills.
"Our initial reaction is that they heard us," said Sarah Miller, chief executive of the Institute of International Bankers. "We believe many of our institutions with a smaller U.S. footprint will not be as severely impacted" as they would have been under the draft proposal released in April.
"It's quite possible that some foreign banks will seek to minimize their exposure to the U.S. as a result of these living-will requirements," said Walter Mix, a former California bank regulator who heads the financial-services practice for the Berkeley Research Group, a consulting firm.
If regulators deem any financial firms that aren't organized as banks to be a potential threat to the financial system, those firms would have to submit plans as well. Regulators have yet to determine which nonbanks fall into that category.
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The FDIC approved a separate but related rule that covers 37 FDIC-insured banks with $50 billion or more in assets and requires them to file a resolution plan. The plan will be similar to the living wills but require a description of how the banks would dismantle themselves under the law governing bank failures as opposed to the bankruptcy code, which is the legal framework for the failure of bank holding companies.
FDIC officials said 34 bank holding companies covered by the living-wills rule would also have to submit a separate plan under the bank-only regulation.
Large banks around the globe have been waiting for the rules before launching their own planning, lawyers said. Still, some of the largest banks, which face the earliest deadlines for their plans, began work a year ago. Banks face a series of increasingly severe consequences—culminating with forced divestitures—if regulators don't find their living wills credible.
Getting a better picture of these institutions and of what other parts of the financial system are likely to suffer if a firm runs into trouble "allows for better judgment, particularly when you're dealing with the prospect of government intervention," said Mitchell Glassman, a director at Deloitte and a former director of the FDIC division in charge of resolving failing banks.
—Suzanne Kapner and Alan Zibel contributed to this article.
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