U.S.
regulators directed five of the country's biggest banks, including Bank of
America Corp (BAC.N) and Goldman Sachs Group Inc (
GS.N), to develop plans for staving off collapse
if they faced serious problems, emphasizing that the banks could not count on
government help.
The two-year-old program, which has been largely
secret until now, is in addition to the "living wills" the banks
crafted to help regulators dismantle them if they actually do fail. It shows
how hard regulators are working to ensure that banks have plans for worst-case
scenarios and can act rationally in times of distress.
Officials like Lehman Brothers former Chief Executive
Dick Fuld have been criticized for having been too hesitant to take bold steps
to solve their banks' problems during the financial crisis.
According to documents obtained by Reuters, the
Federal Reserve and the U.S. Office of the Comptroller of the Currency first
directed five banks - which also include Citigroup Inc, (C.N), Morgan Stanley (
MS.N) and JPMorgan Chase & Co (
JPM.N) - to come up with these "recovery
plans" in May 2010.
They told banks to consider drastic efforts to prevent
failure in times of distress, including selling off businesses, finding other
funding sources if regular borrowing markets shut them out, and reducing risk.
The plans must be feasible to execute within three to six months, and banks
were to "make no assumption of extraordinary support from the public
sector," according to the documents.
Spokespeople for the five banks declined to comment.
The Federal Reserve also declined to comment.
Recovery plans differ from living wills, also known
as "resolution plans," which are required under the 2010 Dodd-Frank
financial reform law. Living wills aim to end bailouts of too-big-to-fail banks
by showing how they would liquidate themselves without imperiling the financial
system.
"Recovery plans are about protecting the crown
jewels," said Paul Cantwell, a managing director at consulting firm
Alvarez & Marsal. "It's about, 'How do I sell off non-core assets?'
The priority is to the shareholders. A resolution plan is about protecting the
system, taxpayers and creditors."
The recovery plans are being used as part of
regulators' ongoing supervisory process. In Britain, recovery and resolution
plans have both been part of the living will requirements for large banks.
Mike Brosnan, senior deputy comptroller for large
banks at the OCC, said the regulator continuously evaluates contingency
planning at the banks and savings associations it supervises.
“Recovery plans required of the largest banks are
helpful in ensuring banks and regulators are prepared to manage periods of
severe financial distress or instability affecting the banking sector,” he
said.
This summer, nine global banks submitted living wills
to the Fed and Federal Deposit Insurance Corp, and regulators released the
public portion of the documents.
The recovery plans requested in 2010, meanwhile, have
received little publicity. The names of the banks required to submit them have
not been previously disclosed, and Reuters obtained them only through a Freedom
of Information Act request.
The Fed supplied Reuters with the letters requesting
plans from banks, but not the banks' actual plans because they were deemed
confidential supervisory information. The regulator said it was withholding
5,100 pages of information.
MOVING FURTHER FROM DISASTER
Five years after the financial crisis, concerns remain
about whether blow-ups at big banks could lead to another round of taxpayer
bailouts. Trading losses have cost JPMorgan nearly $6 billion so far, and scandals
such as the alleged rigging of an international interest rate benchmark have
only highlighted the risks lurking inside big banks.
These disasters have damaged banks' reputations, but
not their balance sheets. Most are still profitable, and in recent years the
five banks have improved their capital bases and liquidity. They also have been
subjected to annual Federal Reserve stress tests that measure whether the banks
have sufficient capital to weather severe economic scenarios.
Bank of America and Citigroup, in a sense, have
already been executing the kind of moves called for in the recovery plans. Both
have been selling off non-core operations and assets to streamline their
sprawling businesses, after receiving multiple bailouts during the financial
crisis.
Bank of America in June 2011 told Fed officials that
it could shed branches in some parts of the country if it needed to raise
capital in an emergency, a person familiar with the matter said in January. The
proposal was part of a series of options provided to the Fed, including issuing
a tracking stock for Bank of America's Merrill Lynch operations.
But just because the bank proposed selling branches
does not mean it's a desirable move or highly probable, the person said. In the
past year, Bank of America has shown progress in building capital without such
actions. Its Tier 1 common capital ratio increased to 11.24 percent of
risk-weighted assets as of June 30 from 8.23 percent a year earlier.
Tier 1 refers to a bank's core capital and has been the
main focus of regulators in assessing a bank's capital adequacy.
MENTIONED IN PASSING
The banks' chief risk officers, and in the case of
Citigroup, Chief Executive Vikram Pandit, received letters in May 2010
instructing them on what to include in the recovery plans. The requests stemmed
from January 2010 crisis management meetings held by regulators. The letters
sent to the five banks were nearly identical.
Each plan was to address severe financial stress at
the firm, as well as "general financial instability." The plans
should be capable of being executed ideally within three months, but no longer
than six months, the documents said.
The plans should "make appropriate assumptions
as to the valuations of assets and off-balance sheet positions," the documents
said.
Recovery plans have been mentioned in public before,
but only in passing. In testimony to Congress in July 2010, Fed Governor Daniel
Tarullo said the "largest internationally active U.S. banking
organizations" were working on recovery plans. The initiative stemmed from
work led by the Financial Stability Board, a body that coordinates the work of
international financial regulators, he said.
In a presentation in March, JPMorgan Chase said it
had a recovery plan in place and said it was ordered by regulators. The
presentation was organized by Harvard Law School and was closed to the media at
the time, but is available online.
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