5 big banks fail crisis-plan test

Deadline Oct. 1 to fix flaws

In this April 18, 2011 file photo, customers use Wells Fargo Bank ATM machines in Santa Clara, Calif. JPMorgan Chase, Bank of America, Wells Fargo, Bank of New York Mellon and State Street were cited Wednesday, April 13, 2016 by the Federal Reserve and the Federal Deposit Insurance Corp. for gaps in their bankruptcy plans known as "living wills" that they were required to submit.
In this April 18, 2011 file photo, customers use Wells Fargo Bank ATM machines in Santa Clara, Calif. JPMorgan Chase, Bank of America, Wells Fargo, Bank of New York Mellon and State Street were cited Wednesday, April 13, 2016 by the Federal Reserve and the Federal Deposit Insurance Corp. for gaps in their bankruptcy plans known as "living wills" that they were required to submit.

WASHINGTON -- Five of the largest U.S. banks don't have credible plans for winding down their operations without taxpayer help if they should start to fail, federal regulators said Wednesday.

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JPMorgan Chase, Bank of America, Wells Fargo, Bank of New York Mellon and State Street Bank were cited by the Federal Reserve and the Federal Deposit Insurance Corp. for gaps in their bankruptcy plans known as "living wills" that they were required to submit. The five banks -- with a total of about $5.6 trillion in assets -- were among eight Wall Street banks whose plans were evaluated.

Each bank received a letter detailing regulators' expectations. The two agencies found the five banks' plans are "not credible" or insufficient for an orderly restructuring in the event of bankruptcy. The regulators gave the banks an Oct. 1 deadline to fix the problems or face possible "more stringent" requirements. That could include ordering the banks to beef up their capital cushions against unforeseen losses. If regulators aren't satisfied, banks eventually could be forced to sell off assets.

Wall Street appeared unruffled by the news, and stocks of major banks rose in U.S. trading. The Dow Jones industrial average rose 187.03 points, or 1.1 percent, to end Wednesday at 17,908.28.

Investors view the banks' shortcomings in their "living wills" mainly as a housekeeping problem rather than an indication of fundamental financial weakness.

"No financial company should be considered too big to fail," said John Dearie, acting chief executive of the Financial Services Forum, a banking industry group. "It is in the best interest of the industry that all large institutions have credible resolutions plans and, with that in mind, institutions will continue to work to address the technical shortcomings identified in this round of regulatory feedback."

The regulators' announcement came in a week when several major banks are expected to report weak earnings for the first quarter.

The banking industry as a whole has recovered steadily since the financial crisis, racking up climbing quarterly profits, but it's been a tough slog for big banks in recent months. Profits and share prices have fallen as bank loans to energy companies have soured and the Fed signaled it will slow the pace of interest rate increases, which hurts bank profits. The financial industry is the worst-performing sector of the S&P 500 this year.

The "living will" assessments are part of the regulators' effort to avoid another taxpayer bailout of Wall Street banks in a crisis and to end the marketplace perception that the government would step in and rescue them.

The exercise was mandated under the 2010 financial overhaul law enacted after the crisis that struck in 2008 and set off the recession. It is designed to ensure that big banks -- which received hundreds of billions of dollars in bailouts -- are prepared in case of financial disaster and aren't "too big to fail."

The fall of Lehman Brothers in September 2008 demonstrated what could happen when huge, complex financial firms land in bankruptcy court, so the resolution plan process was designed to ensure big banks in the U.S. can be wound down quickly without taking others with them.

Under the financial-overhaul law, the FDIC has the authority to seize and dismantle big financial firms.

The banking industry sought to soften the findings Wednesday, arguing that Wall Street is stronger now than it was before the financial crisis.

"We are going to do everything we can to fix this issue," JPMorgan Chief Executive Officer Jamie Dimon said during a conference call with reporters.

The biggest U.S. bank, with some $2 trillion in assets, JPMorgan Chase reported Wednesday that its first-quarter profit fell more than 8 percent from a year earlier, hurt by weak performance in its investment business. Still, the earnings came in better than analysts had expected.

Any potential breakup of JPMorgan would be at least two years away, if regulators continued to find the bank's plan to be deficient. And any capital that JPMorgan, or the other banks, would have to raise to meet the regulators' demands would also be at least six months away. In a conference call with investors, JPMorgan's finance chief, Marianne Lake, said any costs tied to meeting regulators' requirements would likely be modest.

Complex legal structures are a big factor in the problems the regulators had with the banks' plans. JPMorgan's plan, for example, relies on moving cash and holdings away from its overseas subsidiaries, a step that could be difficult in a global financial crisis.

In their 18-month review, the Fed and the FDIC also found weaknesses that must be addressed in the plans of Goldman Sachs and Morgan Stanley. The agencies' assessments differed. Only the FDIC deemed Goldman's plan "not credible," the more serious label, while only the Fed accorded the "not credible" finding to Morgan Stanley.

The agencies also found shortcomings to be fixed in Citigroup's plan, but they didn't rise to the "not credible" level.

Wells Fargo said it was "disappointed" by the regulators' assessment of its plan. Still, the bank noted that the regulators acknowledged that it had taken steps to correct the problems.

"We view the feedback as constructive and valuable," San Francisco-based Wells Fargo said in a statement.

Bank of New York Mellon said it "is committed to addressing the issues raised within the required timeframe" and has taken important steps to improve its ability to be restructured if necessary.

The Fed and the FDIC already had put the big banks on notice in mid-2014 that they had to correct serious deficiencies in their "living wills" -- such as a lack of details and relying on unrealistic assumptions. The banks were told to go back to the drawing board. Only the FDIC, not the Fed, used the "not credible" wording at that time.

Information for this article was contributed by Marcy Gordon and Ken Sweet of The Associated Press, Renae Merle of The Washington Post and by Jesse Hamilton and Elizabeth Dexheimer of Bloomberg News.

A Section on 04/14/2016

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