Federal Reserve criticises ‘living wills’ of Bank of America, Citi, Goldman and JPMorgan

Federal Reserve criticises ‘living wills’ of Bank of America, Citi, Goldman and JPMorgan

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US regulators have found weaknesses in the plans laid out by Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase for how they would handle their own failures.

The Federal Reserve and the Federal Deposit Insurance Corporation said on Friday that, among the eight largest US lenders, they had spotted shortcomings in the “living wills” of those four lenders. The FDIC had already voted on Thursday to deem Citi’s living will “deficient” in at least one area.

All four banks had shortcomings related to their portfolios of derivatives contracts, which they and their clients use to hedge and trade risk.

The Fed and the FDIC found minor issues with JPMorgan and Bank of America, saying the two banks’ systems for unwinding certain derivatives trades had not been fully tested. The regulators called out Goldman for a lack of “trade-level” information on its derivatives transactions, ordering it to submit a plan for resolving the issue by early September.

Citi’s rebuke was the most severe, with the FDIC saying the bank’s resolution plan was not credible or would not facilitate an orderly resolution under the US bankruptcy code.

In addition to the issue with its derivatives portfolio, the regulators said Citi had failed to resolve issues it had previously been cited for related to its “resolution data integrity and data management issues”.

However, while the FDIC viewed Citi’s data management weakness as a “deficiency” that undermined the feasibility of its resolution plan, the Fed called Citi’s data issues a less severe “shortcoming” that raised questions of feasibility but did not entirely undermine its resolution strategy. That assessment echoed one that the Fed had made in the past.

Given that the regulators split on the severity of Citi’s problem, the bank is not likely to face penalties at this time. But, like Goldman, it was ordered to submit a plan to resolve the issues regulators identified by September 1.

Citi was fined $400mn three years ago by the Office of the Comptroller of the Currency for problems related to the way it collects and records data. The bank has yet to resolve that consent order.

In a statement, Citi said it was “fully committed” to addressing the regulators’ concerns. “More broadly, we continue to have confidence that Citi could be resolved without an adverse systemic impact or the need for taxpayer funds,” it said.

Jane Fraser, Citi’s chief executive, singled out regulatory compliance in a presentation to investors on Tuesday as an area where it had been “too slow” to move under her leadership.

Living wills were introduced following the 2008 financial crisis to prevent the risk of a major lender’s failure bringing down the entire system in future. The banks must submit their plans for approval every other year.

It is not uncommon for regulators to flag shortcomings in the plans with little penalty. In 2016, Citi was the only one of the eight largest banks whose living will was not faulted by the Fed, the FDIC or both regulators. Regulators again flagged issues at several banks in 2020, without formally rejecting any of the living wills.

On Friday the regulators said the lenders where they found weaknesses had until July 1 next year to address the shortcomings. Bank of America, Goldman Sachs and JPMorgan Chase declined to comment.

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