Global: Regulators Criticize Living Will Plans of Major U.S. Banks

On Friday, banking regulators revealed weaknesses in the resolution plans of four of the eight largest American banks. The Federal Reserve and the Federal Deposit Insurance Corp. (FDIC) found the “living wills” submitted in 2023 by Citigroup, JPMorgan Chase, Goldman Sachs, and Bank of America to be inadequate.

The regulators identified issues in how these banks planned to unwind their extensive derivatives portfolios. Derivatives are financial contracts linked to assets like stocks, bonds, currencies, or interest rates.

For instance, when Citigroup was asked to quickly test its ability to unwind its contracts using different assumptions than those it had selected, the bank fell short, according to the regulators. This particular test appeared to challenge all the banks involved.

“An assessment of the covered company’s capability to unwind its derivatives portfolio under conditions that differ from those specified in the 2023 plan revealed that the firm’s capabilities have material limitations,” the regulators said regarding Citigroup.

Living wills are a crucial regulatory requirement introduced after the 2008 global financial crisis. Every two years, the largest U.S. banks must submit plans detailing how they would unwind themselves in case of failure. Banks found lacking must address these issues in their next submissions, due in 2025.

While the plans from JPMorgan Chase, Goldman Sachs, and Bank of America were each deemed to have a “shortcoming” by both the Fed and the FDIC, Citigroup’s plan was considered by the FDIC to have a more severe “deficiency.” This means Citigroup’s plan would not allow for an orderly resolution under U.S. bankruptcy code. However, since the Fed did not agree with the FDIC’s assessment of Citigroup, the bank received the less severe “shortcoming” grade.

“We are fully committed to addressing the issues identified by our regulators,” said Citigroup in a statement. “While we’ve made substantial progress on our transformation, we’ve acknowledged that we have had to accelerate our work in certain areas. More broadly, we continue to have confidence that Citi could be resolved without an adverse systemic impact or the need for taxpayer funds.”