-
Despite pressure from the Obama administration, banks are not going public with their concerns if the debt ceiling isn't increased, instead quietly urging members to wrap it up as they prepare contingency plans.
July 26
WASHINGTON — As President Obama and Congress continue to wrangle over raising the debt limit, federal regulators are prepping procedures to help guide institutions through a U.S. default while big bank executives are stepping up pressure on policymakers to act.
Until recently, many in the banking industry had assumed that Democrats and Republicans would eventually cut a deal. While that is still possible, time is rapidly running out before the looming Aug. 2 deadline and it's become increasingly unclear whether the two sides can reach an accord.
As a result, the industry appears to be treating the issue as a realistic possibility, making back-up plans in case the U.S. does default on its debt while breaking their silence to date on the debate.
"It's a clear sign that both the industry and the regulatory community are taking it pretty seriously," said Kevin Petrasic, a partner with Paul, Hastings, Janofsky & Walker LLP. "The fact that …the industry and the regulatory community is having to spend resources already just to do some contingency planning is a good sign in the sense that folks aren't taking anything for granted. It's recognition that at any given point in time, things can unravel, and potentially unravel quickly."
The top executives of the country's largest banks sent a letter Thursday to policymakers warning them of "severe" consequences if the debt ceiling is not raised.
"A default on our nation's obligations, or a downgrade of America's credit rating, would be a tremendous blow to business and investor confidence — raising interest rates for everyone who borrows, undermining the value of the dollar, and roiling stock and bond markets — and, therefore, dramatically worsening our nation's already difficult economic circumstances," said the letter, which was signed by Jamie Dimon, JPMorgan Chase & Co.'s chief executive, and Vikram Pandit, Citigroup's CEO, among several others.
It marked the first time the CEOs had gone public on the issue. While large bank lobbyists had quietly warned lawmakers of grave consequences of a U.S. default, they had been reluctant to inject themselves too far into the debate for fear that it could backfire. Many Tea Party activists, who have successfully made the debt limit a top political issue, distrust big banks after the financial crisis.
Regulators, meanwhile, were also making plans to act if policymakers can not strike a deal. In an email Thursday morning, a Treasury official said the department would provide more information about how the government would operate without new borrowing authority as the Aug. 2 deadline approaches.
After that date, the government will have exhausted its borrowing authority, and may have to delay payments for Social Security and Medicare benefits, military salaries, tax refunds and other commitments, Treasury has said. The Office of the Comptroller of the Currency said Thursday that the agency is planning to issue guidance for banks concerning the implications for consumers if the debt limit is not raised.
This is the first time regulators have acknowledged that they are working on contingency plans. While most concerns about the default have focused on banks' exposure to a credit ratings downgrade, other potential issues relating to consumers are becoming apparent. For example, if federal benefits payments are disrupted and some customers inadvertently overdraw their accounts as a result, the OCC will encourage banks to work with their customers and exercise judgment on overdraft fees or penalties.
It issued similar guidance following Hurricane Katrina in 2005, and the Gulf Coast oil spill in 2010.
"We try to provide guidance after large events that could affect a significant population of bank customers," said Bryan Hubbard, an OCC spokesman.
The guidance would likely be a general call to encourage banks to work with customers facing these issues — rather than outlining specific actions banks should take — and also provide them some assurance that regulators will not penalize them for doing so.
Guidance issued after the oil spill, for example, said "examiners would consider the unusual circumstances banks and credit unions in affected areas may have with respect to safety-and-soundness issues in determining the appropriate supervisory response." The OCC said other regulators are considering similar guidance, and they were consulting one another about the possibility of issuing joint instructions. It was unclear when such guidance would be released.
A spokesman for the Federal Deposit Insurance Corp. would not comment on whether guidance was in the works.
A spokeswoman for the Federal Reserve said the central bank, which serves as the fiscal agent for the United States, had been "engaged in operational planning" with the Treasury Department.
"We expect to be able to give additional guidance to financial institutions when there is greater clarity from the Congress and as Treasury details its specific plans," she said.
Banks have largely refrained from weighing in on the debt ceiling debate, fearing their input could undercut negotiations, or open them up to criticism.
The letter released Thursday by the Financial Services Forum warned that the consequences of inaction would be "very grave," and urged Congress to correct the country's fiscal course, inspire market confidence by paying all bills on time, and demonstrate that the country's leaders are capable of putting aside its differences to resolve this issue.
"A credible and predictable path forward, entailing tough decisions on the budget, will create the needed environment for businesses and entrepreneurs to start, grow, innovate, and create high quality jobs for Americans, now and in generations to come," the letter said.
It was signed by Pandit, Dimon, Brian Moynihan of Bank of America; Lloyd Blankfein of Goldman Sachs; James P. Gorman of Morgan Stanley; State Street Corp. Chairman and CEO Joseph Hooley; US Bancorp chairman, president and CEO Richard Davis; Wells Fargo & Co. chairman and CEO John Stumpf; and BNY Mellon chairman and CEO Robert Kelly.
The letter was also signed by Financial Services Forum President Robert Nichols, and other financial industry leaders, including Thomas J. Wilson, the chairman and CEO of Allstate Insurance Co., Jim Weddle, a managing partner with Edward Jones, Steven Kandarian, the president and CEO of MetLife Inc.; and John R. Strangfield, the chairman and CEO of Prudential Financial Inc.
