The Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve rejected financial crisis plans of five of the largest U.S. banks on Wednesday, designating the legislatively required blueprints as “not credible”.
The stress-tests, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, were implemented after the financial crisis of 2008 in order to ensure that government bailouts would not be be required if a bank was forced to declare bankruptcy.
Specifically, Bank of America, Wells Fargo, JPMorgan Chase, Bank of New York Mellon and State Street Bank’s “living wills” were deemed insufficient by both government agencies.
Morgan Stanley and Goldman Sachs only had their plans rejected by one of the agencies, while Citigroup was found to have problems but the only one of the major eight not have their proposal explicitly denied.
“It could have been considerably worse,” said a financial policy analyst for Capital Alpha Partners. “The banks are essentially getting a do-over, the way an impatient but tolerant high school teacher might let a student take a math test.”
The banks now face an Oct. 1 deadline to re-submit and have their emergency plans approved or else be forced to raise capital requirements which could hurt their respective bottom-lines.
The country’s largest financial institutions have been working on the mandated contingency plans for four years now, the previous submissions having been rejected in 2014.
If the living wills fail to pass government requirements again when the final deadline hits in July 2017, the banks would be forced to “break up” by 2018, through the sale of assets.
[Politico] [AP] [Photo courtesy consultadd.com]