WASHINGTON, (Reuters) – U.S. regulators gave a failing grade to five big banks yesterday, including JPMorgan Chase & Co and Wells Fargo & Co, on their plans for a bankruptcy that would not rely on taxpayer money, giving them until Oct. 1 to make amends or risk sanctions.
The move officially starts a long regulatory chain that could end with breaking up the banks. Nearly a decade after the financial crisis, it underscored how the debate about banks being “too big to fail” continues to rage in Washington and exasperate on Wall Street.
The banks failed for reasons ranging from the way liquidity would be housed and shuffled among domestic and foreign subsidiaries to the manner in which executives would communicate problems as they arose during a crisis.
Wednesday’s announcement was the first time the two major banking regulators, the Federal Reserve and the Federal Deposit Insurance Corporation, issued joint determinations flunking banks’ plans, commonly called “living wills.”
If the five, which also included Bank of America Corp , State Street Corp and Bank of New York Mellon Corp., do not correct serious “deficiencies” in their plans by October, they could face stricter regulations, like higher capital requirements or limits on business activities, regulators said.
Accomplishing that task may not be easy: criticized banks have five months to reassess and rewrite wide swaths of their resolution plans to regulators’ satisfaction. At the same time, compliance departments will also be focused on regulatory stress tests, whose results will be released before October.
If the deficiencies persist for two years, then the banks will have to divest their assets. They have until July 2017 to address more minor “shortcomings.”
The regulators’ report coincided with the start of banks’ earnings reporting period and bank shares rallied. Shares of JP Morgan, Citigroup and Bank of America all closed up more than 3 percent and Wells Fargo shares were up 2.87 percent.
The requirement for a living will was part of the Dodd-Frank Wall Street reform legislation passed in the wake of the 2007-2009 financial crisis, when the U.S. government spent billions of dollars on bailouts to keep big banks from failing and wrecking the U.S. economy.
The plans are separate from the Fed’s stress tests, where banks demonstrate stability by showing how they would withstand economic shocks in hypothetical scenarios.
“The FDIC and Federal Reserve are committed to carrying out the statutory mandate that systemically important financial institutions demonstrate a clear path to an orderly failure under bankruptcy at no cost to taxpayers,” FDIC Chairman Martin Gruenberg said in a statement. “Today’s action is a significant step toward achieving that goal.”
