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While nine of the largest, most complex U.S. banks largely followed the same template in filing their "living wills," there were subtle but significant differences in their approach.
July 3 -
Nine of the most systemically important banks will submit their resolution plans to the FDIC and Federal Reserve by Tuesday, with the public portion of the so-called living wills expected to be released that afternoon.
June 29 -
Thousands of pages will soon arrive in Washington in the first round of living wills for systemically important firms. Many observers say these initial drafts could shape future standards and determine the wills' effectiveness in ending "too big to fail."
June 25 -
"It is about saving the financial economy, not saving a firm," says Jim Wigand, the 28-year FDIC veteran tasked by Congress with ending Too-Big-to-Fail bailouts.
May 16
WASHINGTON — Citigroup Vice Chairman Michael Helfer said Thursday that banks' living wills are "valuable" despite complaints by some that they are impractical and overly burdensome.
Citi was among the nine largest U.S. banks that submitted resolution plans to regulators in July, detailing how they could be taken apart in the event they were in danger of failing. Helfer revealed that Citi's plan was roughly 2,300 pages — and was not considered one of the most voluminous plans.
Bank of America (BAC), Barclays (BCS), JPMorgan Chase (JPM), Credit Suisse (CS), and Deutsche Bank (DB) were also among the initial batch to submit their living wills, along with Goldman Sachs (GS), Morgan Stanley (MS) and UBS.
"Regulators will have plenty of information to review as they consider their response and requests for additional data," Helfer said at a conference hosted by Deloitte, the Bretton Woods Committee, and the University of Maryland Robert H. Smith School of Business.
The Federal Deposit Insurance Corp. and the Federal Reserve Board, the two agencies responsible for oversight of the process, have stressed that initial plans should be seen as one of many steps in an iterative process. The aim of the requirement is to help regulators prevent the chaos seen in the financial markets following Lehman Brothers' collapse in September 2008.
Critics argue that because regulators and institutions do not actually have to follow the plans in the event of a crisis, they are a waste of time, money and effort.
But Helfer said such efforts, which required "hundreds of thousands of hours and millions of dollars" to complete, were not futile. He cited Dwight Eisenhower, who famously said, "While plans are nothing, planning is everything."
"The resolution plan provides regulators and the institutions, themselves, with information about the legal structure, business operations, technology resources, foreign operations, and much more, including reams of financial information broken down by core business line," Helfer said. "This information, updated and in consistent form, is information that regulators will need readily in hand in the event of a resolution is ultimately required."
Institutions are required under law to update their resolution plans annually and notify regulators in the event of a material change, at which point regulators will use their discretion whether it's necessary to update the plan immediately.
"The plan itself, particularly as it evolves over time and based on the interaction with the regulators and the institutions, will be an invaluable source and an immediate source of readily available information that can be used in the event of a failure," Helfer said.
The bank's vice chairman also applauded efforts by the FDIC to implement its orderly liquidation authority. Regulators have outlined a single-point-of-entry approach to unwind a firm that is on the verge of collapse.
Under FDIC regulations, when a financial giant becomes insolvent, the parent company will be seized while the subsidiaries and affiliates will be allowed to continue to operate and their obligations honored. Shareholders will be wiped out, management fired and the board dismissed. The entire company will be placed into a receivership and a bridge bank will be created. Losses exceeding shareholder equity will be absorbed by creditors and any remaining creditor claims will be converted into an ownership stake in the bridge bank.
Helfer called the approach "very sensible, primarily because it allows the subsidiary bank to stay solvent and operating while the holding company fails. This approach is systemically protected, because the holding company by definition doesn't have deposits."
He said that although foreign counterparts may have concerns about the U.S. resolution mechanisms, he thinks those worries will be alleviated by the FDIC's approach.
"The use by the FDIC of its Title II authority would, I believe, substantially mitigate the obstacles that could otherwise exist to international cooperation precisely because the subsidiary bank will remain solvent and operating," Helfer said. "I believe further development on the part of the regulators of the details about how Title II resolution would work will lead to increased understanding and recognition of the value of the FDIC's Title II approach in U.S. and in foreign countries."
Helfer disputed assertions that regulators' resolution authority was yet another bailout and continuum of the "too big to fail problem."
"I believe that criticism is unwarranted," he said. "The bailout charge arises from the fact that Title II authorizes temporary government funding for the new bridge holding company if it is needed and not otherwise available. But Title II flatly prohibits taxpayer funds from being used to pay for losses in the failed banking institution."
Rather, orderly liquidation funding can be provided only if fully protected by unencumbered assets by the institution. If that's not the case, there will be clawbacks against creditors and ultimately a levy on the largest institutions to reimburse the government, he said.
"There can be no taxpayer bailout or taxpayer losses under Title II precisely because care was taken by Congress to ensure that there would be no cost to the taxpayer," Helfer said.
