WASHINGTON Federal Reserve Board Chair Janet Yellen on Wednesday defended the credibility of living will plans submitted by the country's largest banks, saying it was a complex but useful process.
Still, Yellen acknowledged that although regulators may accept such plans, it does not necessarily mean a bank could be effectively unwound in the event of a crisis.
"Accepted does not necessarily mean they are credible," said Yellen, testifying before the House Financial Services Committee in her second appearance on Capitol Hill this week to discuss the Fed's semi-annual monetary policy report.
Rep. Patrick McHenry, R-N.C., seized on her response as "disconcerting."
"If living wills are intended for that purpose to unwind these firms during a cataclysmic event, then they should be credible," said McHenry.
The Fed chair, however, tried to convey the nuance of such a complex process, where regulators are working closely with U.S. banks to create effective plans to resolve the institution in the event of a catastrophe.
"My understanding of the process is this is a difficult, new responsibility for the banking organizations and for us, and that we would have iterations back and forth with the firms and set expectations, look at what they provided, and offer feedback," she said.
Under the Dodd-Frank Act, large financial institutions are required to submit plans yearly describing how they could liquidated in a rapid and orderly fashion without bringing down the entire economy or requiring a taxpayer bailout.
Each year, regulators are required to review and evaluate each plan, and can, if warranted, reject plans if they find them to be inadequate. So far, no living will has been rejected.
The line of questioning by McHenry, a member of the Financial Services committee, closely resembled a query by Sen. Elizabeth Warren, D-Mass., who challenged Yellen at a Senate Banking Committee hearing on Tuesday whether regulators were fulfilling their responsibility in decisively specifying whether plans submitted by companies can be relied upon in the event of a failure.
"The plans are designed not just to be reviewed by the Fed and the Federal Deposit Insurance Corp., but also to bring some kind of confidence to the marketplace, and to the American taxpayer that, in fact, there really is a plan for doing something if one of these banks start to implode," said Warren, during Tuesday's hearing.
At issue, Warren argued, is a critical question: Can a U.S. bank like JPMorgan Chase & Co., which has $2.5 trillion in assets with 3,391 subsidiaries be resolved safely with little impact on the economy, if the collapse of Lehman Brothers, with $639 billion in assets and a little more than 200 subsidiaries, sparked a global panic?
"Can you honestly say that JPMorgan could be resolved in a rapid and orderly fashion as described in its plans with no threats to the economy and no need for a taxpayer bailout?" asked Warren.
During Tuesday's hearing, Yellen defended the process as complex, often involving thousands of pages that are carefully reviewed by regulators.
"I think we what we need to do is give them a roadmap for where we see obstacles to orderly resolution under the bankruptcy code," said Yellen.
The Fed chair said regulators are close to providing feedback on the second round of plans submitted last year. Firms have recently submitted a third round of plans.
But that answer was still unsatisfactory to Warren.
"I'm a little bit confused," said Warren. "JPMorgan submitted a round of plans in 2012, and my understanding is that neither the Fed nor the FDIC said that those plans were not credible. It then submitted plans in 2013, and neither the Fed nor the FDIC said they were not credible. And it has submitted plans in 2014. So I'm not quite sure on whether you're saying the plans are not credible, and you're continuing to talk with them and asking them to change their plans."
Yellen responded by saying it may be too early to tell.
"What was intended is that this determination you're talking about, about whether or not they're credible the question is, do they facilitate an orderly resolution?" said Yellen. "And I think we need to give these firms feedback."