On a recent Friday, federal banking overseers identified deficiencies in the contingency strategies of major U.S. banks.
The shortcomings in so-called “living wills”—blueprints for orderly dissolution in the face of turmoil—were announced by the Federal Reserve and the Federal Deposit Insurance Corporation concerning Citigroup, JPMorgan Chase, Goldman Sachs, and Bank of America, which had presented their 2023 plans.
Focus was especially placed on the banks’ approaches to disbanding their extensive derivatives operations effectively. Derivatives are complex financial agreements valued on underlying assets such as stocks, bonds, currencies, or rates.
Citigroup, for example, failed to demonstrate satisfactory performance when regulators demanded a simulated contraction of its derivative engagements with variables different from those originally proposed by the institution. This challenge proved problematic for all the banks that did not meet expectations.
Concerning Citigroup, regulatory agencies remarked, “Reviewing the company’s capability to scale down its derivatives portfolio under varied scenarios compared to what was detailed in the 2023 plan suggested notable inadequacies.”
Introduced as a regulatory requirement after the 2008 financial crisis, living wills are critical to ensuring banks can be disassembled without causing widespread chaos. Biennially, the United States’ largest banks must outline their resolution strategies, aiming for credible dismantlement in a disastrous scenario. Banks noted for their deficiencies must refine their strategies in time for the next submission cycle in 2025.
Citigroup’s strategy was tagged by the FDIC as having a genuine “deficiency,” implying that the bank’s plans fell short of maintaining structural integrity under the nation’s bankruptcy regulations. Despite the FDIC’s position, Citigroup was granted the less severe classification of “shortcoming” since the Federal Reserve did not align with the FDIC’s evaluation.
Citigroup, stationed in New York, asserted their commitment: “We are fully committed to addressing the issues identified by our regulators,” and acknowledged the acceleration in addressing gaps. The bank also reaffirmed its belief in a resolution that wouldn’t negatively affect the broader financial system or require taxpayer intervention.
JPMorgan, Goldman Sachs, and Bank of America refrained from commenting when approached by CNBC.
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