JPMorgan, Others Living Will Plan Chided by Regulators

U.S. banking regulators have detected flaws in strategies that JPMorgan Chase JPM, Citigroup C, Bank of America BAC and Goldman Sachs GS submitted. These outline the companies' plans for winding down in the event of a catastrophic event.

The Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) stated that they had observed shortcomings in the ‘living wills' of these four lenders. Per agencies, a shortcoming is a weakness that raises doubts about the plan's feasibility.

The Dodd-Frank legislation passed in 2010 mandated that banks of a certain size create these plans regularly, outlining how they could be wound down in the event of a crisis without endangering the larger financial system. This mandate was part of steps taken in the wake of the 2008 financial crisis.

The degree of vulnerability in the Citigroup strategy was the point of contention between the two regulators. While the Fed continued to assign the bank's strategy a less severe ‘shortcoming' grade, the FDIC declared that it was sufficiently flawed to warrant a more significant ‘deficiency.'

Per the FT report, the derivatives contract that each of the four banks and their clients use to trade and hedge risk has flaws.

JPMorgan and Bank of America had minor problems that the Fed and the FDIC found, claiming that their systems for unwinding specific derivatives trades had not been thoroughly tested. Goldman Sachs was criticized for not providing ‘trade-level' details on its derivatives transactions.

The flaws in JPMorgan, Bank of America, Goldman and Citigroup's 2023 plans emerged when they were asked to simulate an unwind of their derivatives and trading positions across two separate time frames.

The FDIC chastised Citigroup most, stating that the bank's resolution plan was either not credible or would not enable a smooth bankruptcy process following U.S. laws. Apart from the problem with its derivatives portfolio, the regulators stated that the company had neglected to address concerns regarding its "resolution data integrity and data management issues."

In the case of Citigroup, regulators claimed the weakness was due to a flaw noted in the company's 2021 plan ‘regarding resolution data integrity and data management issues.'

All four banks must report to regulators on plans to correct their inadequacies by September. These plans must also address the shortcomings in the banks' next resolution plans, due on Jul 1, 2025.

Other major banks, such as Morgan Stanley, State Street, Bank of New York Mellon and Wells Fargo, had plans submitted. Regulators failed to find any substantial weaknesses.

Currently, JPM and C carry a Zacks Rank #3 (Hold), while BAC and GS have a Zacks Rank #2 (Buy).

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