WASHINGTON — Federal regulators approved the resolution plans of the eight largest U.S. banks on Tuesday, but faulted half of them for areas that need improvement.

The Dodd-Frank Act required banks with more than $50 billion of assets to provide a detailed plan, known as a living will, of how they could be dismantled without government help if they began to fail. The plans must be signed off on by regulators.

In its latest evaluation, the regulators said the plans of the eight biggest institutions passed muster, but cited areas of improvement for Bank of America, Goldman Sachs, Morgan Stanley and Wells Fargo. All four must revise their resolution plans when they make their next submission in 2019.

“Reflecting the significant progress made in recent years, the [Federal Deposit Insurance Corp.] and the Federal Reserve Board on Tuesday announced that the resolution plans of the eight largest and most complex domestic banking organizations did not have ‘deficiencies,’ which are weaknesses severe enough to trigger a resubmission process that could result in more stringent requirements,” the agencies said in a joint release.

Signage for Bank of America and Wells Fargo branches.
Regulators found flaws in the living wills of both Bank of America and Wells Fargo, but said they were not severe enough for them to fix immediately. They must correct them, however, prior to their next submission in 2019. Bloomberg News

The firms that passed without objections were Citigroup, JPMorgan Chase, Bank of New York-Mellon and State Street.

In the case of Wells Fargo, the agencies said that the bank’s living will “did not include sufficient documentation and analysis relating to impediment identification and mitigation,” which they said “raises questions regarding the degree to which identified divestiture options are actionable.”

The agencies instructed Wells to “provide a comprehensive analysis of potential significant impediments to execution for each divestiture option and clear mitigating strategies that could be taken, if needed, to address those impediments.”

Bank of America's plan, meanwhile, “did not adequately assess the complexity of the firm’s derivatives portfolio, and contained conflicting information regarding its residual portfolio,” the agencies said. Regulators noted that they intend to develop a guidance document prior to the 2019 submission deadline to address dealer firms’ derivatives portfolios, and that if the company’s 2019 submission does not adequately adhere to the guidance, then it might find its submission “not credible.”

“If the agencies jointly decide that this shortcoming is not satisfactorily addressed in the 2019 Plan, the agencies may determine jointly that the 2019 Plan is not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code,” the agencies' letter to Bank of America said.

The agencies criticized Morgan Stanley’s legal entity structure, which it said “contains 27 material entities,” and could increase “the inherent risk of misallocating resources.” The agencies said that structure “raises questions about the firm’s ability to execute its strategy across a range of scenarios.” The firm was instructed to “include consideration of the risk of misallocating resources to [material entities] within its complex ownership structure and identify mitigants to that risk” in their 2019 submission.

Goldman Sachs was noted in their 2017 submission for not including “sufficient documentation and analysis relating to impediment identification and mitigation,” which the agencies said “raises questions regarding the degree to which identified divestiture options are actionable.”

While the firm did identify and assess some potential impediments to its divestiture options, the agencies said, that assessment was “not sufficiently detailed” and the firm was instructed to “provide a comprehensive analysis of potential significant impediments to execution for each divestiture option, along with clear mitigating strategies that could be taken, if needed, to address those impediments.”