Exclusive: U.S. banks told to make plans for preventing collapse
U.S. regulators directed five of the country’s biggest banks,
including Bank of America Corp and Goldman Sachs Group Inc, to develop plans
for staving off collapse if they faced serious problems, emphasizing that the
banks could not count on government help.
The two-year-old program, which has been largely secret until
now, is in addition to the “living wills” the banks crafted to help regulators
dismantle them if they actually do fail. It shows how hard regulators are
working to ensure that banks have plans for worst-case scenarios and can act
rationally in times of distress.
Officials like Lehman Brothers former Chief Executive Dick Fuld
have been criticized for having been too hesitant to take bold steps to solve
their banks’ problems during the financial crisis.
According to documents obtained by Reuters, the Federal Reserve
and the U.S. Office of the Comptroller of the Currency first directed five
banks – which also include Citigroup Inc,, Morgan Stanley and JPMorgan Chase
& Co – to come up with these “recovery plans” in May 2010.
They told banks to consider drastic efforts to prevent failure
in times of distress, including selling off businesses, finding other funding
sources if regular borrowing markets shut them out, and reducing risk. The
plans must be feasible to execute within three to six months, and banks were to
“make no assumption of extraordinary support from the public sector,” according
to the documents.
Spokespeople for the five banks declined to comment. The Federal
Reserve also declined to comment.
Recovery plans differ from living wills, also known as
“resolution plans,” which are required under the 2010 Dodd-Frank financial
reform law. Living wills aim to end bailouts of too-big-to-fail banks by
showing how they would liquidate themselves without imperiling the financial
system.
“Recovery plans are about protecting the crown jewels,” said
Paul Cantwell, a managing director at consulting firm Alvarez & Marsal.
“It’s about, ‘How do I sell off non-core assets?’ The priority is to the
shareholders. A resolution plan is about protecting the system, taxpayers and
creditors.”
The recovery plans are being used as part of regulators’ ongoing
supervisory process. In Britain, recovery and resolution plans have both been
part of the living will requirements for large banks.
Mike Brosnan, senior deputy comptroller for large banks at the
OCC, said the regulator continuously evaluates contingency planning at the
banks and savings associations it supervises.
“Recovery plans required of the largest banks are helpful in
ensuring banks and regulators are prepared to manage periods of severe
financial distress or instability affecting the banking sector,” he said.
This summer, nine global banks submitted living wills to the Fed
and Federal Deposit Insurance Corp, and regulators released the public portion
of the documents.
The recovery plans requested in 2010, meanwhile, have received
little publicity. The names of the banks required to submit them have not been
previously disclosed, and Reuters obtained them only through a Freedom of
Information Act request.
The Fed supplied Reuters with the letters requesting plans from
banks, but not the banks’ actual plans because they were deemed confidential
supervisory information. The regulator said it was withholding 5,100 pages of
information.
MOVING FURTHER FROM DISASTER
Five years after the financial crisis, concerns remain about
whether blow-ups at big banks could lead to another round of taxpayer bailouts.
Trading losses have cost JPMorgan nearly $6 billion so far, and scandals such
as the alleged rigging of an international interest rate benchmark have only
highlighted the risks lurking inside big banks.
These disasters have damaged banks’ reputations, but not their
balance sheets. Most are still profitable, and in recent years the five banks
have improved their capital bases and liquidity. They also have been subjected
to annual Federal Reserve stress tests that measure whether the banks have
sufficient capital to weather severe economic scenarios.
Bank of America and Citigroup, in a sense, have already been
executing the kind of moves called for in the recovery plans. Both have been
selling off non-core operations and assets to streamline their sprawling
businesses, after receiving multiple bailouts during the financial crisis.
Bank of America in June 2011 told Fed officials that it could
shed branches in some parts of the country if it needed to raise capital in an
emergency, a person familiar with the matter said in January. The proposal was
part of a series of options provided to the Fed, including issuing a tracking
stock for Bank of America’s Merrill Lynch operations.
But just because the bank proposed selling branches does not
mean it’s a desirable move or highly probable, the person said. In the past
year, Bank of America has shown progress in building capital without such
actions. Its Tier 1 common capital ratio increased to 11.24 percent of
risk-weighted assets as of June 30 from 8.23 percent a year earlier.
Tier 1 refers to a bank’s core capital and has been the main
focus of regulators in assessing a bank’s capital adequacy.
MENTIONED IN PASSING
The banks’ chief risk officers, and in the case of Citigroup,
Chief Executive Vikram Pandit, received letters in May 2010 instructing them on
what to include in the recovery plans. The requests stemmed from January 2010
crisis management meetings held by regulators. The letters sent to the five
banks were nearly identical.
Each plan was to address severe financial stress at the firm, as
well as “general financial instability.” The plans should be capable of being
executed ideally within three months, but no longer than six months, the
documents said.
The plans should “make appropriate assumptions as to the
valuations of assets and off-balance sheet positions,” the documents said.
Recovery plans have been mentioned in public before, but only in
passing. In testimony to Congress in July 2010, Fed Governor Daniel Tarullo
said the “largest internationally active U.S. banking organizations” were
working on recovery plans. The initiative stemmed from work led by the
Financial Stability Board, a body that coordinates the work of international
financial regulators, he said.
In a presentation in March, JPMorgan Chase said it had a
recovery plan in place and said it was ordered by regulators. The presentation
was organized by Harvard Law School and was closed to the media at the time,
but is available online.
(http://www.law.harvard.edu/programs/about/pifs/symposia/europe/baer.pdf)
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