After Wall Street has spent years trying to convincing regulators how they could collapse without disrupting the financial system, the largest U.S. banks will soon have to take the additional step of showing how they can keep from failing in the first place.
The Office of the Comptroller of the Currency, which is responsible for maintaining the safety and soundness of national banks, is planning to propose a requirement that lenders with more than $50 billion in assets to provide blueprints for how they'll withstand a crisis and maintain their businesses. It's a big undertaking for bank compliance staffs and the first time many of the largest regional firms would have to submit formal survival strategies.
"Effective planning is critical to the resiliency of banks' core business lines and critical operations," OCC Chief Thomas Curry said in a statement. The initiative will lay out enforceable guidelines for recovery planning that lets a bank keep its doors open under severe stress, he said.
The Federal Reserve set the stage last year with a similar recovery-planning system for eight of the biggest bank holding companies, but the agency's staff has been more focused on what happens after a failure. The Fed and Federal Deposit Insurance Corp. have to manage the banks' so-called living wills, plans required by the Dodd-Frank Act that outline how they could be safely resurrected if recovery efforts fail.
The OCC plans would be backed by the teeth of enforcement, so banks could face penalties if they consistently fall short of the new requirements. The agency took a similar approach with recent rules that demanded better risk management and more skeptical boards at banks, specifying that banks that don't comply could face enforcement action.
In last year's move, the Fed advised banks including JPMorgan Chase & Co. and Citigroup Inc. that they needed a menu of options for surviving a range of problems, as long as a reasonable chance remained that they could return to health. The strategies are supposed to be regularly updated and include plans regarding the possible sale, transfer or disposal of significant assets, portfolios, legal entities or business lines.
The OCC will invite public comments on its proposal, and it could be months before anything formal takes effect. The $50 billion threshold for the agency's initiative would rope in many more companies than the Fed's policy, including the banking units of firms such as U.S. Bancorp and PNC Financial Services Group Inc.
If such banks are included in a new policy that mirrors the Fed's, it will be a "meaningful additional requirement," according to John Simonson, a former FDIC official who is now a partner at PricewaterhouseCoopers LLP.
"These firms would have been doing some sort of recovery planning, but this is going to make it much more formal," said Simonson, who was a deputy director in the FDIC office responsible for big-bank resolutions. That would mean a "much larger effort for a number of the firms," he said.
The largest U.S. banks are waiting to hear whether they satisfied the Fed and FDIC with their living wills submitted in July. Earlier versions brought rejections last year for every bank except Wells Fargo & Co. Banks that fail to produce credible plans can be required to simplify their businesses or raise more capital.
Simonson said that at least some of the work banks have done planning for their demise will translate over to planning for their return to viability.
"There's a lot that can be leveraged between the two," he said.