FDIC and Federal Reserve demand revisions to living wills of top banks

The Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve (Fed) have raised concerns about the living wills of major U.S. banks, demanding revisions.

Living wills are essential plans detailing how banks would handle a potential crisis and wind down operations without sparking broader economic turmoil. The scrutiny has particularly highlighted weaknesses in the plans of Bank of America, Citigroup (Citi), Goldman Sachs, and JPMorgan Chase.

US authorities slam major banks

Each of these top banks has been found to have shortcomings in their respective living wills, specifically related to their strategies for unwinding derivatives positions.

Bank of America’s plan was flagged for its inability to use dates outside normal business processes for estimating resource needs in unwinding its derivatives portfolio. This raises concerns about its capability to implement its preferred resolution strategy during an actual financial crisis.

Goldman Sachs was criticized for the way it handles its derivatives portfolio, particularly its ability to segment the portfolio in a manner that accounts for trade-level characteristics.

Both the Fed and the FDIC disagreed on the complexity and granularity required to accurately measure exit timing and costs and on the difficulty of unwinding the portfolio in a resolution scenario.

Related: America’s debt disaster will either boost or break crypto

JPMorgan Chase also faced criticism for its derivatives unwind strategy. The regulators pointed out that the bank is unable to update certain economic conditions when calculating the necessary capital and liquidity to unwind its derivatives portfolio promptly. This inability risks the bank’s resolution planning and overall financial stability.

Citigroup draws more concerns

Citigroup was the most frequently mentioned bank the FDIC and the Fed have a problem with. The regulators don’t like the severity of Citi’s living will deficiencies. FDIC chair Martin Gruenberg has labeled Citi’s plan as not credible, indicating that it wouldn’t facilitate an orderly resolution under U.S. bankruptcy law.

The regulators also identified a major deficiency in Citi’s data governance, particularly its ability to unwind its derivatives portfolio accurately. This issue means Citi’s calculations for resolution capital and liquidity needs are off the mark, posing significant risks in a crisis scenario.

Contrastingly, the Fed has taken a slightly softer stance, classifying Citi’s shortcomings as less severe. The FDIC’s finding, while symbolic, carries weight in regulatory terms. When one agency labels a plan as having a shortcoming and the other as having a deficiency, the plan is deemed to have a shortcoming overall.

The FDIC emphasized that until Citi resolves these data reliability issues, it must effectively ensure its governance routines compensate for these weaknesses.

Jai Hamid