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Can Living Wills Enable Foreign Banks to Overcome Drawbacks?

Zacks Equity Research
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The ‘Living Wills’ of the U.S. units of Deutsche Bank DB, Barclays BCS, Credit Suisse CS and UBS Group UBS had certain weaknesses, but none severe enough to demand additional restrictions or stringent regulations. This was announced by the U.S. banking regulators — the Federal Reserve and the Federal Deposit Insurance Corp (“FDIC”).

The FDIC and the Fed noted these banks will be required to improve “how each firm communicates and coordinates between its U.S. operations and its foreign parent in stress.” Also, Credit Suisse was asked to improve its ability to estimate “the liquidity needs of its U.S. intermediate holding company” at the time of crisis.

Further, the banking regulators noted that the four foreign banks have substantially lowered the size and risk profiles of their U.S. divisions as well as raised their liquidity and capital levels. These changes have made it easier to dissolve them, if need arises.

The concerned banks have been notified individually. They are required to address these shortcomings at the time of submitting their next resolution plans, due on Jul 1, 2020.

In a statement, Deutsche Bank said that the company will address the concerns and noted that findings “demonstrates our progress simplifying and enhancing the resolvability of our U.S. operations.”

Requirement & Purpose of ‘Living Wills’

‘Living Wills’ requires large banks to outline the ways to liquidate, by breaking up and selling off assets, in case they are on the verge of collapse. The main goal is to avoid re-run of the 2008 financial crisis, when the Lehman Brothers Inc. went down. These also reduce the risks of further bailouts, if these banks sink in the event of another financial crisis.

Earlier, banks with more than $50 billion in assets were required to submit resolution plans annually. Now, as part of new banking regulation law enacted in May 2018, banks with assets of $250 billion or more must file a living will. Also, the regulators have discretion to demand plans from banks with at least $100 billion in assets.

Thus, now domestic banks including JPMorgan JPM, Bank of America BAC, Goldman GS, Wells Fargo, Citigroup and Morgan Stanley are required to submit their ‘Living Wills.’

Can ‘Living Wills’ Serve Their Purpose?

Banks have been revising their resolution plans to overcome the shortcomings pointed out by the Fed and the FDIC. But whether the ‘Living Wills’ will serve its purpose or not is a big question.

Hypothetically, it is easy to say that resolution plans should be made in a way such that they would not adversely impact the overall financial system. However, in practice, it is difficult to mitigate the harm, as banks depend considerably on mutual businesses.

Concurrent with announcement of the above-mentioned news, the regulators have finalized the resolution plan guidance for the eight “largest and most complex domestic banking organizations.” The final guidance is almost similar to the one issued in June 2018, while requiring additional information “in areas such as capital, liquidity, and payment, clearing, and settlement activities.”

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