The Hidden Positives in Big Banks’ Awful Living Wills
By Lalita Clozel

On the face of it, federal regulators’ rejection Wednesday of five megabanks’ resolution plans was a stunning rebuke after years of work between the banks and the agencies and further evidence that they remain “too big to fail” more than eight years after the financial crisis. Yet the bad grades and detailed laundry list of fixes that institutions must make in the next five months — or face possibly severe consequences — may actually prove helpful in the long run, both to the debate over “too big to fail” and the banks themselves….Regulators’ decision to come out jointly against five firms — another first since the process began in 2011 — also “signals a paradigm shift,” said Karen Shaw Petrou, the managing partner of Federal Financial Analytics. This time, she said, the regulators were willing to use “actual binding standards that force structural change.” The FDIC found most banks’ living wills noncredible in 2014, but the Fed disagreed. As a result, regulators did not start a regulatory clock that would give them authority to impose stricter standards.  Regulators may also have wanted to provide more details given a recent ruling against the Financial Stability Oversight Council in court. A federal judge criticized the FSOC’s reasoning for designating MetLife as a systemically important financial institution, in part because it did not provide enough specifics to justify its actions. “I think it appropriately put the Fed and FDIC on notice that rulings, especially those of the strategic significance of the living wills, that don’t stand up to that kind of analytical rigor could be subject to challenge,” said Petrou. Agency officials stressed that the determinations did not reflect a higher standard this time around, but that they would adjust their judgment for every iteration, as was mandated by the Dodd-Frank Act.