(Adds further detail, reactions)
By Douwe Miedema and Emily Stephenson
WASHINGTON Aug 5 U.S. regulators warned Wall
Street banks on Tuesday to improve plans that spell out how they
would avoid taxpayer bailouts during a future crisis or face
tough repercussions, including being forced to break up their
Six years after the financial crisis, the Federal Deposit
Insurance Corp and Federal Reserve said the so-called living
wills 11 big banks submitted last year were overly optimistic,
allowed banks to be too complex, and would not enable them to go
through bankruptcy without government support.
"The plans provide no credible or clear path through
bankruptcy that doesn't require unrealistic assumptions and
direct or indirect public support," said Thomas Hoenig, second
in command at the FDIC.
The 11 banks sent in living wills for the third time this
year, laying out how they could enter bankruptcy without causing
the mayhem that triggered costly government bailouts in 2008.
These plans, often thousands of pages thick, range from
mundane data as where to reach key staff to complex discussions
of how to unwind legal entities in the United States and abroad.
But the FDIC said on Tuesday it had decided the second set
of plans, submitted in 2013, were "not credible." The Fed did
not take quite as harsh a tone, but both warned that the plans
needed considerable work.
Banks also submitted a round of living wills in July 2014,
but regulators were still evaluating the previous submission.
Their comments on Tuesday only covered the 2013 documents.
If banks' 2015 plans do not address the criticisms, both
agencies said they would declare that the plans did not meet the
requirements of the 2010 Dodd-Frank Act.
Firms would have a formal period to correct problems if
their living wills were deemed deficient by both regulators, who
could then tell banks to cut down their business after two years
if things did not improve, a senior Fed official said.
The regulators did not publicly disclose problems with
individual 2013 plans, although they sent the banks private
letters spelling out the issues.
The submissions included unrealistic assumptions about the
likely behavior of customers and others and failed to identify
the changes in the structure of their firms that would enable
such an "orderly resolution," the regulators said.
They said the banks across the board need to simplify legal
structures and change financial contracts to avoid an exodus of
trading partners during insolvency.
The banks also need to develop a holding company structure
to support resolvability, make sure that they could continue to
use shared services during insolvency, and work on producing
reliable data quickly, the Fed and FDIC said.
Banks had complained they did not get enough feedback from
regulators on the living wills. Regulators' tough language
surprised some industry observers on Tuesday.
"It would seem to be incongruous to make a determination of
'not credible' without having provided feedback really on the
first or second times companies filed their plans," said Mike
Krimminger, a former FDIC official who is now a partner at
Cleary Gottlieb Steen & Hamilton in Washington.
Goldman Sachs Group Inc, Bank of America Corp
, Morgan Stanley, JPMorgan Chase & Co,
Citigroup Inc, Barclays PLC, Deutsche Bank AG
and Bank of New York Mellon Corp declined to
comment. Calls to Credit Suisse Group AG, State Street
Corp and UBS AG were not immediately returned.
(Reporting by Douwe Miedema and Emily Stephenson; Additional
reporting by Hendry David, Lauren LaCapra and Peter Rudegeair in
New York; Editing by Sandra Maler and Lisa Shumaker)