Fed/FDIC on Living Wills (Apr. 13)

Mike & Co.,

Two weeks after the MetLife decision was handed down, here come the Fed/FDIC living will findings that half of the nation’s eight SIFI banks failed to submit “credible” plans. 

The main policy takeaways from two developments appear at first blush to diverge sharply.   MetLife restricts the authority of the USG (or FSOC) to designate SIFIs, while the Fed/FDIC verdict extends USG’s its reach over the biggest banks further than it has before. 

But from another perspective, the two developments demonstrate the operation of law, slow to engage at first perhaps, and not always linear — but the FSOC appeal might lead on the more confidence In DFA and its successes attack in fighting TBTF and protecting taxpayers.  More below.




The Federal Reserve and FDIC announced today that five of the eight U.S. based global systemically important banks do not have “credible” living wills.  The regulators said JPMorgan Chase, Bank of America, Wells Fargo, Bank of New York Mellon and State Street failed to show that they could be safely unwound during bankruptcy.  The delinquent banks have until October 1 to bring their plans into order or face stricter regulations.  The next round of wills comes due July 2017.

Report Cards 

Mostly Satisfied:  Citigroup


  • JPMorgan
  • Chase
  • Bank of America
  • Wells Fargo
  • Bank of New York Mellon

Split Decision:

  • Goldman Sachs (FDIC/fail; Fed/pass)
  • Morgan Stanley (FDIC/pass; Fed/fail)

Living Wills vs. Short-termism

The living will process underscores or at least reinforces the theme of fighting short-termism along two fronts.  One obvious, one less so:

  • Penalties Constrain Corporate Finance.  If banks miss the October 1deadline for cleaning up their dissolution documents they are set to face unspecified regulatory increases.  In the past these have taken the shape of limits on stock buybacks, dividend payments, and other corporate finance moves that emphasize short-term profit over long-term investment and growth.
  • Living Wills = Longer-Term ThinkingThe process of writing a living will is inherently a risk-mitigating venture; nobody wants to make plans for their own funeral.  Banks are forced to take a long and hard look in the mirror when writing out these documents, which itself may cause them to behave in a more self-aware manner, or the theory is.

Signs of DFA’s Strength or Weakness?

While some (Neil Kashkari?) might see today’s events as reason to move forward with plans to break up big banks, a more objective view would be that the living wills system is working as intended – if perhaps a bit slowly.  As mentioned above, the system itself takes a two-pronged approach to changing the ways that big banks operate (by punishing inadequately prepared banks and forcing banks to confront their risky behavior and quantify it) which has already resulted in three GSIBs publishing acceptable, if not perfect, will documents.

A Proposal on the Table

At least one way in which regulators can improve upon the living will process, according to the Government Accountability Office, is by increasing their transparency.

In a paper issued yesterday, the GAO said that the Federal Reserve and FDIC should publish the criteria they use to judge wills so that banks will have an easier time meeting their requirements.  The Fed and FDIC have both agreed with the GAO’s assessment, at least in part, and are working on ways to implement those recommendations.  The two regulators have already signaled that they’re on board with the proposal.   Candidates who embrace the idea will be putting their money where their mouth is on financial regulation – signaling that they support regulations but that they have faith in the ability of regulators.

On the topic of transparency: the release this morning gave at least some details on why banks fell short.  JPMorgan, according to the regulators, did not have sufficient models for estimating how it would keep money flowing to its significant operations during a bankruptcy resolution.  Bank of America had a shortcoming in its plan to wind down its portfolio of derivatives.

Regulators are sure to have in mind the CFTC’s ongoing legal battle with MetLife, the giant life insurance company and erstwhile SIFI.  Transparency (a lack of) was a central issue in the MetLife ruling, and has also become the subject of Senate legislation concerning the Commodity Futures Trading Commission.

Consequences & Calendar for the Five 

The five banks which failed outright have until October 1, 2016 to get their wills up to snuff, while the two “split decision” banks were provided with guidance on how to adjust their own plans to better align with regulators’ wishes but won’t face a hard deadline.  Banks are due to submit their next living wills in July 2017.

Beyond the obvious consequences if banks fail to meet the October 1 deadline for updated wills, today’s announcement sets in motion more serious developments.  Under DFA the FSOC can force big banks to restructure or sell off certain assets if they remain too big to fail for too long – today’s findings are another step forward in building that case if regulators decide to pursue such action.





1 thought on “Fed/FDIC on Living Wills (Apr. 13)”

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