WASHINGTON – Big banks have less than a month to fix their resolution plans – or potentially face severe regulatory consequences.

Regulators failed five of the largest U.S. banks in April, and gave them six months to fix problems outlined in their living wills. As a result, Oct. 1 could be a moment of reckoning for the living-will process and the firms themselves.

"By now, all firms take resolution planning very seriously," said John Simonson, a principal at PwC and a former deputy director in the Federal Deposit Insurance Corp. of the office that oversees resolution plans. "They're all painfully aware of the enormous hammer that the agencies have at their disposal, if the plans remain not credible."

The current scramble marks a significant change from how big banks initially treated living wills, according to several individuals who have followed the back-and-forth between firms and regulators since its beginnings after the 2010 passage of the Dodd-Frank Act.

It's not that banks didn't take the process seriously at first, industry representatives are quick to say. But the submission-and-feedback cycle has evolved, and the possibility of pushback from regulators – which could include the imposition of higher capital requirements or forced divestiture – is now staring them in the face.

Banks "took the process extremely seriously from day one," said Karen Shaw Petrou, managing partner of Federal Financial Analytics. "I think the difference now is a better understanding … of the goals."

Financial institutions initially worried that envisioning their own demise would harm their reputation – while serving no immediate purpose.

In a 2011 letter to federal regulators, David T. Hirschmann, president for the Center for Capital Markets Competitiveness of the U.S. Chamber of Commerce, called the exercise an "essentially unbounded requirement to develop a resolution plan covering a multitude of speculative scenarios in order to attempt to satisfy an unattainable regulatory standard."

Certain firms also operated under the assumption that resolution planning was a set-up for a scenario in which the Federal Deposit Insurance Corp. could take over and liquidate a failing financial institution, as outlined in Dodd-Frank's Orderly Liquidation Authority provision. Under OLA, the FDIC can draw from a Treasury fund that would have to be repaid by industry through deposit insurance assessments.

But regulators did not want the banks to rely on government interference. Instead, they wanted the plans drafted as if the government wouldn't step in.

"Many of the banks were planning for an OLA liquidation, and in fact they did not understand they were preparing for a bankruptcy," said Petrou.

That was a turning point, observers said.

"When the agencies began focusing on everything that could be achieved under Title I" – government assistance was only possible under Title II – "they made this a much more credible process," said Robert Burns, a managing director at Chain Bridge Partners and previously the FDIC's deputy director for risk management supervision.

In April, regulators provided their most detailed feedback to date and gave banks a clear ultimatum.

The five firms that were failed by both the Fed and the FDIC – JPMorgan Chase, Bank of America, Wells Fargo, Bank of New York Mellon and State Street – were required to refile modified versions of their 2015 plans in response to the deficiencies outlined by the regulators.

Meanwhile, the other three firms – Goldman Sachs and Morgan Stanley, which both received a thumbs down from only one regulator, and Citigroup, which received a pass from both – will be required to resubmit plans as well, though they do not face immediate consequences if they fail to satisfy regulators.

What followed was a mad dash on behalf of the firms to make the changes in time.

"It's all hands on deck," Simonson said.

Several of the big banks had already held regular meetings with regulators – including one bank that convened with FDIC staff on 65 occasions to discuss its 2015 living will. But these meetings appear to have become more regular, individuals familiar with the talks said.

Banks can now meet weekly – at least – with agency staff to discuss their plans during "office hours," several sources said. And top-level management occasionally pops in.

"With the April letters, essentially what happened is the clock started to tick," said a former FDIC official, speaking on the condition of anonymity. "And senior management have become much more focused now on this effort."

With this push from the top, banks' teams dedicated to resolution planning are receiving the internal support they need, instead of being treated at arm's length by colleagues.

These teams "are dependent upon other areas of the firm for information, and sometimes work product," said the former agency official. "Now these other organizations within the firm are more committed to providing assistance."

Some argue that the shift in tone has come from the regulators as much as the banks. The process appeared to have begun with both sides playing hot potato on determining what form the plans should take.

An FDIC official admitted as much during a 2010 roundtable about the living wills.

"There's no way that we could define a resolution plan, and we think there's probably no way that the firms could define a resolution plan without talking to us," said Michael Krimminger, then the deputy for policy for FDIC Chair Sheila Bair.

Developing rules on the living wills would likely have to be "an iterative process," Krimminger said at the time.

That's why many in the industry argue that the process was bound to take years, and that the April feedback, while harsh, was not necessarily out of line with the progress they say has been made since the first living wills were submitted in 2010.

"Some things needed to just happen in sequence in order to get to where we are today," said an employee at one of the eight banks, speaking on condition of anonymity. For instance, the employee said, firms have significantly reduced the legal entities they operate under, in response to regulators' feedback.

And regulators in turn have been able to provide more detailed directions to the banks as the process evolved.

"We have for the first time in this round clear guidance from the regulators regarding what we need to address," said the same employee.

H. Rodgin Cohen, senior chairman at Sullivan & Cromwell and one of the country's pre-eminent banking lawyers, said that at first "nobody was sure whether this could work."

"But I think as banks have dug into it and they learned more about themselves and all the issues ... a lot of that skepticism has disappeared," he said. "Nobody wants to go through 2008 ever again, because we've seen how devastating that can be. ... The banks would want each other to be in good shape and nobody would want to be the cause of a financial catastrophe."

But to get to this latest stage, regulators also had to overcome their own disagreements.

"There had always been this debate both within the [FDIC] and between the [FDIC and the Fed] as to when the plans should be determined to be credible," said the former FDIC official. "Earlier this year, they came to an agreement that, 'OK, this is the time in which we have to grade the plans.' "

Because regulators were able to agree on determining several of the firms noncredible for the first time, they were also able to direct firms to revise their plans in the span of a few months. (Dodd-Frank provides for a resubmission window that can be as small as 30 days.)

Still, a dose of healthy skepticism remains in some quarters.

"Some of the most important things about what make [global, systemically important banks] resolvable cannot be addressed by the GSIBS," said Petrou, citing the handling of derivatives and ring-fencing in the prospect of a big bank failure. "They can only be addressed by the policymakers."

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