US regulators sign off on large bank 'living wills'
U.S. financial regulators have approved the "living wills" submitted by the nation's largest banks, signaling significant progress in their plans for potential failure without requiring taxpayer bailouts. The Federal Deposit Insurance Corp. (FDIC) and the Federal Reserve Board jointly announced that the resolution plans of the eight largest domestic banking organizations did not contain "deficiencies."
These "living wills," formally known as resolution plans, are crucial documents detailing how a bank could be unwound in an orderly manner during a severe financial crisis. The recent approval indicates that the plans are now deemed sufficient to avoid the kind of chaotic collapse that could necessitate government intervention, a primary objective established after the 2008 financial crisis. Regulators signed off on plans spelling out how banks would fail without needing a taxpayer bailout, The Wall Street Journal reported.
The joint statement from the agencies highlighted "significant progress made in recent years" by the institutions. A "deficiency" is defined as a weakness severe enough to trigger a mandatory resubmission process, which could lead to more stringent regulatory requirements for the affected banks. The absence of such deficiencies marks a notable improvement over prior evaluation cycles.
Despite the overall satisfactory grades, regulators identified specific areas for improvement for several institutions. Bank of America, Goldman Sachs, Morgan Stanley, and Wells Fargo were among those cited for needing further enhancements to their plans, according to American Banker.
For Wells Fargo, the agencies noted that its living will "did not include sufficient documentation and analysis relating to impediment identification and mitigation." This observation raised questions regarding the degree to which identified divestiture options within its plan were actionable, American Banker reported.
Goldman Sachs was similarly noted for issues in its 2017 submission. Regulators stated that its plan at that time lacked "sufficient documentation and analysis relating to impediment identification and mitigation," which also raised concerns about the actionability of its proposed divestiture options, American Banker added.
This latest positive assessment follows earlier criticisms of banks' resolution plans. In 2024, regulators "dinged" some banks, stating that their plans did not adequately demonstrate how they could safely unwind their complex derivatives portfolios, WTAQ reported. The Purdue Business website also referenced a recent critique by U.S. regulators concerning these living wills, underscoring ongoing concerns about the resilience of major banks.
The requirement for large banks to submit living wills originated from the Dodd-Frank Act, enacted in the wake of the 2008 financial crisis. This legislation aimed to address the "too big to fail" problem, ensuring that even the largest and most interconnected financial institutions could be resolved without destabilizing the broader financial system or relying on public funds. The goal is to minimize moral hazard and protect taxpayers from future bailouts.
The satisfactory grades represent a significant milestone in the continuous effort to enhance financial stability and reduce systemic risk. However, the specific areas for improvement highlighted for some institutions indicate that regulators will maintain scrutiny over the robustness and practicality of these resolution strategies. The process is designed for ongoing refinement, ensuring the plans remain effective and adaptable under various severe stress scenarios.