Banking regulators have disclosed deficiencies in the resolution plans, or “living wills,” of four of the eight largest American lenders. The Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) announced on Friday that the 2023 resolution plans submitted by Citigroup, JPMorgan Chase, Goldman Sachs, and Bank of America were found inadequate.
Concerns Over Derivatives Portfolios
The primary issue identified by regulators was the banks’ strategies for unwinding their extensive derivatives portfolios. Derivatives are complex financial instruments tied to the value of assets such as stocks, bonds, currencies, or interest rates. The regulators’ assessment revealed significant shortcomings in the banks’ ability to effectively manage these portfolios in a crisis.
For instance, Citigroup was tested on its ability to unwind its contracts using different scenarios than those initially proposed by the bank. The results indicated material limitations in Citigroup’s capabilities, a problem that also affected the other banks evaluated.
Regulatory Findings and Responses
The living wills exercise, mandated post-2008 financial crisis, requires major U.S. banks to submit plans every two years demonstrating their ability to orderly unwind operations without triggering widespread economic disruption. Regulators identified a “shortcoming” in the resolution plans of JPMorgan Chase, Goldman Sachs, and Bank of America. However, Citigroup’s plan was classified as having a more serious “deficiency” by the FDIC, indicating it would not ensure an orderly resolution under U.S. bankruptcy law. The Federal Reserve, while noting shortcomings, did not fully concur with the FDIC’s severe assessment of Citigroup.
In response, Citigroup expressed commitment to addressing the issues highlighted by regulators. “We are fully committed to addressing the issues identified by our regulators,” the bank stated. “While we’ve made substantial progress on our transformation, we’ve acknowledged that we have had to accelerate our work in certain areas. More broadly, we continue to have confidence that Citi could be resolved without an adverse systemic impact or the need for taxpayer funds.”
JPMorgan Chase, Goldman Sachs, and Bank of America declined to comment on the findings.
Looking Ahead
The identified weaknesses must be addressed by the next round of living will submissions, due in 2025. This regulatory exercise remains a crucial measure to ensure that major financial institutions can be dismantled in a manner that prevents systemic risks and protects the broader economy.
Regulators’ scrutiny and the banks’ subsequent improvements will be closely watched, as they play a critical role in maintaining financial stability and preventing future crises similar to the one experienced in 2008.
