The banks have already had to submit two versions of the documents,
neither of which were up to the standards of the Federal Deposit
Insurance Corp and the Federal Reserve. With the next draft of the
documents due in July, banks say they can do little to improve the
plans if there are no detailed instructions from the government,
sources familiar with the process say.
Some regulators say that the plans submitted so far by the banks
wouldn't provide much of a roadmap if a new crisis were to threaten
a large bank today.
"I don't think they'd function very well at all," FDIC Vice Chairman
Thomas Hoenig told Reuters last week. "What's different today than
in 2008? ... We still have major exposures from a systemic
consequence point of view, and if I were to say otherwise I wouldn't
be doing my duty."
Banks may not hear back from the government in time for the July
deadline. Regulators haven't decided whether they will give feedback
by that time, though they hop to get something to banks "soon," said
Arthur Murton, the FDIC official who heads the living wills process.
"It's all moving in the right direction," Murton told Reuters in an
interview. "A year from now we'll be even better positioned."
The 2010 Dodd-Frank law requires banks with more than $50 billion of
assets, including JPMorgan Chase & Co <JPM.N> and Goldman Sachs
Group Inc <GS.N>, to submit annual living wills that describe how
they could be unwound in a bankruptcy process.
Under the law, regulators could eventually tell banks to shrink or
spin off parts of their business if they are not convinced the
living wills would do their job. However, they won't likely give
such orders until after they have advised the banks individually
about shortcomings in the living wills.
Regulators said the first round of living wills in 2012 was poorly
organized and vague on critical information, such as how global
operations under the purview of international regulators would be
treated. After issuing broad guidelines on how to improve the
documents, the second round, filed in October 2013, was still deemed
Banks will struggle to hand in improved living wills by the July
deadline because the regulators haven't agreed on how to give them
consistent, tailored feedback, people close to the process said.
"What do you say to a client having to do (the next round)?" said a
former senior official at the FDIC. "Why should you go make huge
commitments ... when you don't know what the regulators think works
and doesn't work?"
Regulators could still issue broad guidance to the industry, like
they did last year, or extend the July deadline.
Each living will has thousands of pages, including such mundane data
as where to reach key staff if the bank goes under, how to keep
computer systems running, and how to communicate with employees.
It can also contain sections on whether to pay retention packages,
how to produce financial reports, and how to unwind legal entities
in the United States and international jurisdictions.
Much of the work on the living wills falls on a new task force
within the FDIC - the Office of Complex Financial Institutions (OCFI)
- led by Murton, a veteran at the regulator.
The FDIC oversaw the closure of hundreds of banks during the
financial crisis. But it has never had to deal with giant
institutions such as Bank of America <BAC.N> or Citigroup <C.N>,
which often have thousands of legal units all over the world, and
whose books are full of highly complex financial instruments.
"In the fall of 2010 we all looked at each other and said ... now
we've bought the farm, we have this responsibility in case anything
fails, we better be able to do it," the former FDIC official said.
"We came up with some very quick, perhaps a little bit dirty,
Dodd-Frank also charged the OCFI with crafting a plan for winding
down giant, failed banks that can't go through bankruptcy, even
though many critics of the 2008 bailouts would prefer failed banks
to go through bankruptcy court, which is where the living wills come
[to top of second column]
Many long-time employees balked at the thought of joining the OCFI,
and a subsequent inflow of former bankers caused a culture clash at
the FDIC, a large bureaucracy which has had some trouble adapting to
the new task, according to Terry Rouch, who worked at the unit in
"If you have a long-term government employee, they may not be as
well suited for a start-up organization," said Rouch.
A report by the agency's Office of Inspector General in November
last year cited "some initial skills and expectation mismatches"
contributing to a 20 percent staff turnover rate in 2012. Many
current OCFI staffers have come from banks, including some from
institutions such as Washington Mutual and IndyMac Bank that
collapsed, according to a search on LinkedIn.
The watchdog report also said the OCFI wasn't sufficiently
embedded in the organization, and that it had to stop funding two
information systems it had invested $6.2 million in after it found
out they weren't fit for the purpose. Of the OCFI's 10 management
positions listed on its website, four are currently vacant.
FDIC Chairman Martin Gruenberg, who requested the report, said in a
formal response that he agreed with its conclusions and had already
made changes to address some of them.
Much of regulators' criticism of the living wills thus far centers
around banks' loose grip on their own data and information systems
across a vast number of global subsidiaries.
"Something as basic as just mapping out your organization and seeing
how those business lines match up, align with your legal entities, I
mean some of the institutions had never done that," said a second
former FDIC official, who is familiar with the living wills process.
Even so, the Fed and the FDIC themselves have found it hard to agree
on how to communicate with banks about the living wills, given their
different legal mandates, this person said.
That is because the Fed, which regularly supervises the largest
banks, is primarily concerned with preventing firms from approaching
the brink of failure, while the FDIC is responsible for what to do
once a bank is deemed unsalvageable.
"That creates, by design, a tension," the second person said. "Part
of the feedback issue no doubt arises because the two agencies have
those two various responsibilities."
The Fed declined to comment.
"It's a new exercise for all of us," Murton said. "It's complicated,
and we're working cooperatively with the Fed."
Bankers say having two regulators on the job complicates things.
Conference calls frequently must be scheduled with representatives
from both agencies, said one bank lawyer. In one case, the lawyer
said, regulators spent eight weeks on one question before responding
that they could not answer it.
Still, Murton - while acknowledging that more progress is needed -
thinks his agency can cope with the task of a big bankruptcy. "We
are better positioned than we were in 2008 to deal with this,"
(Reporting by Douwe Miedema and Emily Stephenson; additional
reporting by Peter Rudegeair in New York; editing by Karey Van Hall
and John Pickering)
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