Banking and Finance Law Daily Wrap Up, FINANCIAL STABILITY—Fed, FDIC feedback letters flag issues in four large banks’ resolution plans, (Jun 24, 2024)
Organizations Mentioned:Bank of America | Bank of America Corp. | Bank of New York Mellon Corp. | Citigroup | Citigroup, Inc. | Consumer Financial Protection Bureau | Goldman Sachs | Goldman Sachs Group, Inc. | JPMorgan Chase | JPMorgan Chase & Co. | Morgan Stanley | State Street Corp. | State Street Corporation | Wells Fargo | Wells Fargo & Co.
By Jeff Williams
The agencies’ letters direct the banks to submit plans to remediate identified “shortcomings” by September 1.
The Federal Reserve Board and Federal Deposit Insurance Corporation have determined after their reviews of the July 2023 resolution plan submissions of the eight largest and most complex banks that there are “weaknesses” in the plans for four of the companies related to the implementation of their derivative unwind strategies, Bank of America Corp., Citigroup, Inc., Goldman Sachs Group, Inc., and JPMorgan Chase & Co.
The agencies said in a press release they did not identify any weakness in the resolution plans submitted by Bank of New York Mellon Corp., Wells Fargo & Co., State Street Corp., and Morgan Stanley. The resolution plans, also known as living wills, must describe a financial company’s strategy for rapid and orderly resolution in bankruptcy in the event of its material financial distress or failure.
“Ensuring that covered companies can be resolved in a rapid and orderly manner without the need for extraordinary government support or placing taxpayer funds at risk is a top priority for the FDIC, and this is reflected in the findings of this review,” FDIC Chairman Martin Gruenberg said in a statement.
The plans submitted by Bank of America, Goldman Sachs, and JPMorgan Chase contained weaknesses identified as “shortcomings” that raise questions about the feasibility of each plan, the Fed and FDIC said. The agencies also said that they each identified a weakness in the Citigroup plan, but “reached different conclusions about its severity.”
In their feedback letters to each of the eight banks, the agencies identified areas for “continued development of banks’ resolution strategies and capabilities,” while the letters to the four banks with identified shortcomings also detail required “remedial” actions and call for the firms to develop and submit by Sept. 1, 2024, the “key actions” they will take to address the problems.
In the letter to Bank of America, the agencies said the firm’s 2023 plan “lacks the capability to use dates outside of the normal business-as-usual production process for spot derivatives and trading positions in estimating resource needs associated with unwinding its derivatives portfolio.”
The Fed and FDIC said Bank of America should develop the capability to quantify the impact of unwinding the derivatives portfolio on its resolution metrics using any business as-of date.
In their letter to JP Morgan Chase, the agencies said that the firm should address concerns about weaknesses in the company’s “refresh of and approach to compiling financial results,” particularly regarding its ability to update some economic conditions in its entry-level-resources-needs calculation of resolution capital execution need and resolution liquidity execution need.
The agencies’ letter to Goldman Sachs called for the company to address a shortcoming related to its “ability to segment its derivatives portfolio in a manner that accounts for trade-level characteristics, including the complexity and the granularity necessary to accurately measure exit timing, exit costs, and the difficulty of unwinding the portfolio in a resolution scenario.”
Citigroup Conclusions. While the Fed concluded in its letter that the weakness in the Citigroup plan is only a shortcoming, the FDIC determined the Citigroup plan is “not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code and considers the weakness to be a ‘deficiency’” that could undermine the feasibility of the plan.
Under the resolution planning rule of the agencies, they said, when one agency finds a shortcoming and the other finds a deficiency, the plan is deemed to have a shortcoming. The agencies also noted a shortcoming they identified in Citigroup’s 2021 plan related to data quality and data management remains outstanding.
Citigroup’s resolution plan requires “urgent attention,” Gruenberg said, because the company’s forecasting tools and systems used to simulate the unwinding of derivatives and trading positions in resolution “demonstrated that the firm lacks the capability to incorporate updated stress scenarios and assumptions, and that ongoing weaknesses regarding data reliability and the firm’s control environment contributed to materially inaccurate calculations of the resources required to execute its preferred resolution strategy.”
The Bank of America, Goldman Sachs, and JPMorgan Chase plans all “demonstrated weaknesses in their ability to unwind their derivatives and trading portfolios that raise questions about these firms’ abilities to implement their preferred resolution strategies,” Gruenberg said.
In a separate statement, Rohit Chopra, director of the Consumer Financial Protection Bureau and a member of the FDIC board of directors, noted the findings regarding the weaknesses in the JPMorgan Chase, Bank of America, and Goldman Sachs plan and highlighted that the “reliability and fragmentation” of Citigroup’s internal systems could "preclude the firm from credibly executing” its living will.
FDIC Vice Chairman Travis Hill said in a statement he voted against identifying the weakness in the Citigroup plan as a deficiency and would have supported deeming it a shortcoming. Citigroup is “in the midst of a multiyear process” to address previously identified concerns about data quality and controls, “which the firm’s management has prioritized and which includes remediating the specific concerns identified through the resolution planning process.”
Citigroup responded, saying they are “fully committed to addressing the issues identified by our regulators. While we’ve made substantial progress on our transformation, we’ve acknowledged that we have had to accelerate our work in certain areas, including improving data quality and regulatory processes such as resolution planning. We’ve made substantial enhancements in recent years and, as we’ve said, we will invest what is necessary to support this critical effort.”
Companies: Bank of America Corp.; Bank of New York Mellon Corp.; Citigroup, Inc.; Goldman Sachs Group, Inc.; JPMorgan Chase & Co.; Morgan Stanley; State Street Corp.; Wells Fargo & Co.
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