8 Big Banks Get Fed Regulators Approval On 'Living Wills'

On Tuesday, U.S. banking regulators — the Federal Reserve and the Federal Deposit Insurance Corp (“FDIC”) — passed eight largest domestic banking organizations on their "living wills" after completing the evaluation of the resolution plans. These banks include Bank of America Corp. (NYSE:C) , The Goldman Sachs Group, Inc. (NYSE:GS) , Morgan Stanley (NYSE:MS) , Wells Fargo & Co. (NYSE:WFC) , The Bank of New York Mellon Corp. (NYSE:BK) , Citigroup Inc. (NYSE:C) , JPMorgan Chase & Co. (NYSE:JPM) and State Street Corp. (NYSE:STT) .

However, both regulatory agencies have found some shortcomings in the plans of four banks out of the eight firms, which can be improved in the next resolution plan. These four globally important banks include BofA, Goldman, Morgan Stanley and Wells Fargo.

"While significant progress has been made... there are inherent challenges and uncertainties associated with the resolution of a systemically important financial institution," the regulators noted.

Notably, regulators demand improvement in four particular areas, including the management of derivatives, payment, clearing and settlement activities.

Previously, in April 2016, resolution plans of five banks out of these eight were deficient, per the agencies.

The plan, better known as “living will,” lays out the strategy for a company’s fast resolution under bankruptcy in the event of failure of the company or severe financial stress. Under provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the banks (with total consolidated assets of $50 billion or more) are required to submit living wills. The main objective behind the submission of living will is to avoid re-run of the 2008 financial crisis and reduce risks of further bailouts.

A systemic resolution, maximizing the sale value of a failed bank and minimizing creditor losses would help in efficient handling of bank failures. Moreover, the FDIC will have the power to liquidate a bank if its collapse knocks down the country’s financial stability.

Notably, all eight firms require their next resolution plans to be submitted by July 1, 2019.

Among these banks, Morgan Stanley and Bank of New York Mellon carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The regulators are working to improvise the resolution planning process. Therefore, it is expected that the submissions of annual resolution plan can be modified to once in two years in order to extend the time to prepare and review the plans.

Bottom Line

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

Nevertheless, we believe "Living Wills" will help the regulators wind up banks, in case of failures, to some extent. Most importantly, the advance precautions will surely entail into lesser involvement of taxpayers’ money for bailing out troubled financial institutions.

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J P Morgan Chase & Co (JPM): Free Stock Analysis Report

Bank Of New York Mellon Corporation (The) (BK): Free Stock Analysis Report

State Street Corporation (STT): Free Stock Analysis Report

Wells Fargo & Company (WFC): Free Stock Analysis Report

Citigroup Inc. (C): Free Stock Analysis Report

Bank of America Corporation (NYSE:BAC): Free Stock Analysis Report

Morgan Stanley (MS): Free Stock Analysis Report

Goldman Sachs Group, Inc. (The) (GS): Free Stock Analysis Report

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