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Large U.S. banks submit 'living will' crisis plans

In a doomsday scenario, Bank of America Corp. might dismantle some units, turn others over to regulators and transfer certain assets to a temporary bank that would ultimately emerge from the meltdown, it said in a plan released Tuesday.

The Charlotte bank was one of nine top lenders to submit the so-called “living wills,” blueprints for how banks with $50 billion or more in assets might be unwound should they near failure. The exercise, mandated as part of the Dodd-Frank financial reform law, is meant to show such banks aren’t “too big to fail” – and that taxpayers wouldn’t be on the hook for rescuing troubled institutions.

Yet critics say the reports amount to little more than a hypothetical game plan and wouldn’t do much to avert the turmoil that followed the 2008 financial crisis in the event of another catastrophe. Others say detailing which units banks deem marginal might negatively affect employees or spur pressure from analysts and investors to sell off those divisions, even absent severe financial trouble.

“To me, they’re sort of the equivalent of worry beads – they might alleviate the anxiety, but they’re not going to do much about the problem,” SNL Financial contributing editor Nancy Bush said. “If you’re in a condition where you actually need to use one of these things, the conditions are going to be such that you’re not going to be able to do it in a nice, methodical blueprint way.”

The plans disclosed Tuesday provide high-level summaries of how the nine banks, including Bank of America, JPMorgan Chase & Co. and Citigroup Inc., might be unwound, plus a description of their business lines and financial information. The lenders turned in more detailed versions, reported to span thousands of pages, to the Federal Deposit Insurance Corp. and Federal Reserve before the Monday deadline, but those will remain private after a significant pushback from the industry as the rule was being crafted.

A number of lobbying groups and banks told the FDIC it needed to be more explicit in keeping the living wills private. In response, the regulator created the dual report structure, according to the Federal Register.

The FDIC and Fed will have 60 days to either accept or reject the plans. Companies subject to the rule are required to file their initial plans in three groups on a staggered schedule. The first group included bank holding companies with $250 billion or more in total assets.

Under Bank of America’s plan, the lender would place its U.S. subsidiaries into FDIC receiverships and wind down other units “in an orderly manner,” the summary report said. Certain assets would be transferred into a “bridge bank,” and others might be sold to national, international and regional financial institutions, among others.

The plan also includes strategies designed to make sure some core business lines and critical operations would continue, the report said.

Though regulators have pointed to the living wills as evidence that future financial crises will not necessarily lead to heavy taxpayer bailouts, industry critics have said they do little to stem “too big to fail.”

“Living wills are not the silver bullet that regulators seem to think they are,” University of Pennsylvania law professor Nizan Geslevich Packin wrote in a paper published just before the final rule came out. He argued that living wills don’t solve the fact that risk is hard to predict and said it does nothing to make institutions smaller.

Bank analyst Dick Bove of Rochdale Securities said the living wills rank among the “dumbest” requirements of Dodd-Frank.

“Unstated, but a key driver to this amendment is the fact that Congress believes that the regulatory agencies are totally incompetent and, therefore, unable to prevent bank failures,” he wrote in a research note.

Moreover, the resolution plans force banks to tell employees and the public that certain parts of their businesses can be easily eliminated, fueling rumors about which units might be sold off and giving the media “a field day” to criticize those divisions.

“Great job, Congress,” Bove wrote. “The American people really benefit by this one.”