Warren Presses Yellen Over Living Will Determinations

WASHINGTON — Senate Banking Committee members pushed Federal Reserve Chair Janet Yellen Thursday for some indication of whether the central bank would approve banks' so-called "living wills" or instead force asset sales and other steps to simplify their structures.

Sen. Elizabeth Warren, D-Mass., criticized the Fed for failing to assign a "not credible" finding to living wills submitted by 11 of the largest U.S. banks in 2014, even though the Federal Deposit Insurance Corp. believed they were not credible. That decision precluded any forced reorganization of those banks that the Fed and FDIC would be authorized to undertake had both agencies made such a determination.

"I very much hope that the Fed and FDIC are on the same page; that's the only way we're going to get an impact out of this law," Warren said. "Living wills are one of the primary tools that Congress gave to regulators … and it's critical that the Fed use this authority as the FDIC has been willing to do."

Warren challenged Yellen to commit the Fed to issuing a joint determination — one way or the other — with the FDIC when it does publish its conclusions on the resubmitted plans.

"The Fed's refusal to call the plans 'not credible' meant the agencies couldn't use statutory tools to push these risky banks in the right direction," Warren said. "Can you say today that you will work with the FDIC to ensure that the agencies issue joint determinations of credibility on each of the 11 living wills that were resubmitted?"

Yellen declined to commit herself, saying that individual members of the Fed and FDIC boards are responsible for casting their own votes.

"It is up to each member of the Board of Governors and members of the FDIC board … [to arrive] at our own individual judgments as to whether or not these living wills are credible or facilitate resolution," Yellen said. "I cannot guarantee you that we will arrive at identical conclusions."

Warren followed up by asking Yellen to promise to offer a public explanation if the central bank comes to a different conclusion than the FDIC on whether an individual bank's resubmitted living will is credible or not. Yellen again hesitated to be tied down, saying she expects that an explanation of findings would likely be made available at least to the banks themselves.

"My expectation is that we will release the letters that we send to the firms giving our evaluations of their living wills," Yellen said. "We expect to send letters — hopefully they will be joint letters, hopefully we will be able to agree — on what the shortcomings are of the living wills. If either agency finds that they are not credible, we need to identify specific deficiencies that we wish to see remedied."

Dodd-Frank gave the Fed and FDIC the authority to force banks to sell off assets, break up or otherwise reorganize if the agencies determined that the banks were too complex and posed a risk to the financial system. To demonstrate that they are within the bounds of complexity and size acceptable to regulators, the largest banks have to produce detailed plans for how they would be resolved in a bankruptcy proceeding — and those plans have to be deemed credible once a year by both the Fed and FDIC. If the agencies deem a living will "not credible," the regulators have to explain exactly why and give the institutions a year to redraft and resubmit the document.

In 2014, the FDIC determined that the banks' living wills were not credible, but the Fed decided to make no determination either way, though it said in a statement that it agreed with much of the FDIC's reasoning for its "not credible" determination. Banks resubmitted their living wills in July and the agencies have been reviewing them since.

Yellen had said earlier in her testimony in response to questions from Sen. Sherrod Brown, D-Ohio, that the Fed Board has met seven times since the banks resubmitted their living wills to discuss the documents and that she expects to reach determinations soon.

"We are actively engaged and far along in evaluating these plans," Yellen said. "We have not made final determinations … but we will make these determinations in the not-too-distant future. We are still committed to finding the plans that don't meet the specifications we outlined, we are certainly prepared to find them deficient."

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