USA regulators to notify some banks their ‘living wills’ are flawed

Wells Fargo (WFC – Get Report) and Bank of America (BAC – Get Report) say they’re committed to repairing the flaws in proposed “living wills” that federal regulators rejected Wednesday for lacking credibility.

The determinations raised debate about how living wills can help banks survive a financial catastrophe.

Five of the nation’s biggest banks failed a key Dodd-Frank requirement that would make it easier for regulators to oversee a bankruptcy and avoid another big bank bailout, regulators said today. Reuters was unable to verify the story.

The Wall Street Journal, citing an unnamed source, said that in addition to J.P. Morgan Chase, Bank of New York Mellon and State Street Corp. face a negative review from regulators.

“Contradictory outcomes through different tools such as stress tests and living wills harm the ability of regulators to achieve financial stability and for market participants to understand what regulators are doing”, said David Hirschmann, head of the business group’s capital markets center.

If they fail to come up with improved plans they could face “more stringent” requirements.

If the plans are not found to be credible by the Fed and the FDIC, the banks could be forced to restructure – simplifying operations until they could be reasonably wound down or be forced to divest from them.

But some of Wall Street’s loudest critics are enraged that the banks haven’t gone far enough while industry figures and defenders are livid over what they call a broken system and a leak that caught firms off-guard.

State Street’s plan, which it submitted last summer, detailed what it would do in a worst-case scenario to collapse without needing taxpayer assistance.

“No [global systemically important banking organization] has yet shown how it would successfully address all phases of a successful bankruptcy if its failure were imminent”, FDIC Vice Chairman Thomas Hoenig said in a statement.

Bank analysts have previously lambasted the living will. The International Monetary Fund, which rarely attempts to exert influence over the US government, had previously taken an active stance in favor of the living will.

The FDIC found that Goldman’s plan “was not credible or would not facilitate an orderly resolution under bankruptcy”, the FDIC said.

“Without greater disclosure, companies lack information they could use to assess and enhance their plans”, the GAO stated in its report.

Regulators don’t think the banks are in any imminent danger, but rather the exercise is to model what would happen under extreme duress.

Voicing discontent over the process, however, Marianne Lake, JP Morgan’s chief financial officer, said it had received details of the regulators’ decision less than 24 hours before it was made public, which occurred on the morning her bank released its quarterly earnings.

“We were disappointed to learn that our 2015 resolution plan submission was determined to have deficiencies in certain areas“.

While Dodd-Frank supporters claim that the controversial financial reform legislation ended too big to fail, at the same time, the eight firms have been designated as systemically important-meaning that their failure could trigger a financial crisis-by a council created by Dodd-Frank.