Judgment Day for Big Banks as Living-Will Deadline Looms
By Lalita Clozel
WASHINGTON – Big banks have less than a month to fix their resolution plans – or potentially face severe regulatory consequences. Regulators failed five of the largest U.S. banks in April, and gave them six months to fix problems outlined in their living wills. As a result, Oct. 1 could be a moment of reckoning for the living-will process and the firms themselves.… It’s not that banks didn’t take the process seriously at first, industry representatives are quick to say. But the submission-and-feedback cycle has evolved, and the possibility of pushback from regulators – which could include the imposition of higher capital requirements or forced divestiture – is now staring them in the face.  Banks “took the process extremely seriously from day one,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics. “I think the difference now is a better understanding … of the goals.” Financial institutions initially worried that envisioning their own demise would harm their reputation – while serving no immediate purpose…. But regulators did not want the banks to rely on government interference. Instead, they wanted the plans drafted as if the government wouldn’t step in. “Many of the banks were planning for an OLA liquidation, and in fact they did not understand they were preparing for a bankruptcy,” said Petrou…. “Some of the most important things about what make [global, systemically important banks] resolvable cannot be addressed by the GSIBS,” said Petrou, citing the handling of derivatives and ring-fencing in the prospect of a big bank failure. “They can only be addressed by the policymakers.”