WASHINGTON May 7 Almost six years after Lehman
Brothers collapsed, U.S. regulators still haven't given Wall
Street banks individual feedback on how to improve so-called
"living wills" that detail how to go bankrupt without spending
taxpayer dollars or causing a market panic.
The banks have already had to submit two versions of the
documents, neither of which were up to the standards of the
Federal Deposit Insurance Corp and the Federal Reserve. With the
next draft of the documents due in July, banks say they can do
little to improve the plans if there are no detailed
instructions from the government, sources familiar with the
Some regulators say that the plans submitted so far by the
banks wouldn't provide much of a roadmap if a new crisis were to
threaten a large bank today.
"I don't think they'd function very well at all," FDIC Vice
Chairman Thomas Hoenig told Reuters last week. "What's different
today than in 2008? ... We still have major exposures from a
systemic consequence point of view, and if I were to say
otherwise I wouldn't be doing my duty."
Banks may not hear back from the government in time for the
July deadline. Regulators haven't decided whether they will give
feedback by that time, though they hop to get something to banks
"soon," said Arthur Murton, the FDIC official who heads the
living wills process.
"It's all moving in the right direction," Murton told
Reuters in an interview. "A year from now we'll be even better
The 2010 Dodd-Frank law requires banks with more than $50
billion of assets, including JPMorgan Chase & Co and
Goldman Sachs Group Inc, to submit annual living wills
that describe how they could be unwound in a bankruptcy process.
Under the law, regulators could eventually tell banks to
shrink or spin off parts of their business if they are not
convinced the living wills would do their job. However, they
won't likely give such orders until after they have advised the
banks individually about shortcomings in the living wills.
Regulators said the first round of living wills in 2012 was
poorly organized and vague on critical information, such as how
global operations under the purview of international regulators
would be treated. After issuing broad guidelines on how to
improve the documents, the second round, filed in October 2013,
was still deemed insufficient.
Banks will struggle to hand in improved living wills by the
July deadline because the regulators haven't agreed on how to
give them consistent, tailored feedback, people close to the
"What do you say to a client having to do (the next round)?"
said a former senior official at the FDIC. "Why should you go
make huge commitments ... when you don't know what the
regulators think works and doesn't work?"
Regulators could still issue broad guidance to the industry,
like they did last year, or extend the July deadline.
Each living will has thousands of pages, including such
mundane data as where to reach key staff if the bank goes under,
how to keep computer systems running, and how to communicate
It can also contain sections on whether to pay retention
packages, how to produce financial reports, and how to unwind
legal entities in the United States and international
Much of the work on the living wills falls on a new task
force within the FDIC - the Office of Complex Financial
Institutions (OCFI) - led by Murton, a veteran at the regulator.
The FDIC oversaw the closure of hundreds of banks during the
financial crisis. But it has never had to deal with giant
institutions such as Bank of America or Citigroup,
which often have thousands of legal units all over the world,
and whose books are full of highly complex financial
"In the fall of 2010 we all looked at each other and said
... now we've bought the farm, we have this responsibility in
case anything fails, we better be able to do it," the former
FDIC official said. "We came up with some very quick, perhaps a
little bit dirty, approaches."
Dodd-Frank also charged the OCFI with crafting a plan for
winding down giant, failed banks that can't go through
bankruptcy, even though many critics of the 2008 bailouts would
prefer failed banks to go through bankruptcy court, which is
where the living wills come in.
Many long-time employees balked at the thought of joining
the OCFI, and a subsequent inflow of former bankers caused a
culture clash at the FDIC, a large bureaucracy which has had
some trouble adapting to the new task, according to Terry Rouch,
who worked at the unit in 2011.
"If you have a long-term government employee, they may not
be as well suited for a start-up organization," said Rouch.
A report by the agency's Office of Inspector General in
November last year cited "some initial skills and expectation
mismatches" contributing to a 20 percent staff turnover rate in
2012. Many current OCFI staffers have come from banks, including
some from institutions such as Washington Mutual and IndyMac
Bank that collapsed, according to a search on LinkedIn.
The watchdog report also said the OCFI wasn't sufficiently
embedded in the organization, and that it had to stop funding
two information systems it had invested $6.2 million in after it
found out they weren't fit for the purpose. Of the OCFI's 10
management positions listed on its website, four are currently
FDIC Chairman Martin Gruenberg, who requested the report,
said in a formal response that he agreed with its conclusions
and had already made changes to address some of them.
Much of regulators' criticism of the living wills thus far
centers around banks' loose grip on their own data and
information systems across a vast number of global subsidiaries.
"Something as basic as just mapping out your organization
and seeing how those business lines match up, align with your
legal entities, I mean some of the institutions had never done
that," said a second former FDIC official, who is familiar with
the living wills process.
Even so, the Fed and the FDIC themselves have found it hard
to agree on how to communicate with banks about the living
wills, given their different legal mandates, this person said.
That is because the Fed, which regularly supervises the
largest banks, is primarily concerned with preventing firms from
approaching the brink of failure, while the FDIC is responsible
for what to do once a bank is deemed unsalvageable.
"That creates, by design, a tension," the second person
said. "Part of the feedback issue no doubt arises because the
two agencies have those two various responsibilities."
The Fed declined to comment.
"It's a new exercise for all of us," Murton said. "It's
complicated, and we're working cooperatively with the Fed."
Bankers say having two regulators on the job complicates
things. Conference calls frequently must be scheduled with
representatives from both agencies, said one bank lawyer. In one
case, the lawyer said, regulators spent eight weeks on one
question before responding that they could not answer it.
Still, Murton - while acknowledging that more progress is
needed - thinks his agency can cope with the task of a big
bankruptcy. "We are better positioned than we were in 2008 to
deal with this," Murton said.
(Reporting by Douwe Miedema and Emily Stephenson; additional
reporting by Peter Rudegeair in New York; editing by Karey Van
Hall and John Pickering)