Banking regulators revealed on Friday that they found weaknesses in the resolution plans of four of the eight largest American lenders. The Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) announced that the living wills—plans designed to unwind large institutions in the event of distress or failure—of Citigroup, JPMorgan Chase, Goldman Sachs, and Bank of America, filed in 2023, were deemed inadequate.
The regulators pinpointed issues with how these banks planned to unwind their extensive derivatives portfolios. Derivatives are complex financial contracts tied to stocks, bonds, currencies, or interest rates. When regulators asked Citigroup to quickly test its ability to unwind its contracts using different inputs than those chosen by the bank, the firm failed to meet the expectations. This challenge appeared to impact all the banks that struggled with the examination.
Regulators highlighted that Citigroup had “material limitations” in its capability to unwind its derivatives portfolio under different conditions than specified in its 2023 plan. This finding was consistent across the banks examined.
The living wills exercise is a crucial regulatory measure established in the wake of the 2008 global financial crisis. Every two years, the largest U.S. banks must submit credible plans to unwind themselves in the event of a crisis. Banks identified with weaknesses must address them in their next round of living will submissions, due in 2025.
While the plans of JPMorgan Chase, Goldman Sachs, and Bank of America were each categorized as having a “shortcoming” by both regulators, Citigroup’s plan was considered to have a more serious “deficiency” by the FDIC. This deficiency suggests that Citigroup’s plan would not enable an orderly resolution under U.S. bankruptcy code. However, since the Federal Reserve did not concur with the FDIC’s assessment, Citigroup received the less-severe “shortcoming” grade.
In response, Citigroup issued a statement expressing its commitment to addressing the regulators’ concerns. The New York-based bank acknowledged the need to accelerate its work in specific areas despite substantial progress in its transformation. Citigroup emphasized its confidence that it could be resolved without causing systemic harm or requiring taxpayer funds.
The identification of these deficiencies underscores the ongoing challenges large financial institutions face in ensuring their resolution plans are robust and effective. It also highlights the critical role of regulatory oversight in maintaining financial stability and protecting the broader economy from potential systemic risks. As these banks work to address the identified weaknesses, the next set of living will submissions will be crucial in demonstrating their progress and resilience.
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