U.S. Banks Told to Prepare for Collapse

Posted by - Friday, August 10th, 2012

Regulators have instructed five of our nation's biggest banks to develop some serious plans to ward off collapse in lieu of major problems. U.S. regulators were sure to remind these banks that they should not count on any government assistance this time.

Bank of America Corp (BAC.N), JPMorgan Chase & Co (JPM.N), Goldman Sachs Group Inc (GS.N), Citigroup Inc, (C.N), Morgan Stanley (MS.N).

Perhaps those running these banks have learned from the mistakes of Lehman Brothers CEO Dick Fuld who was not quick enough to action, not decisive enough to stave off serious bank problems in the midst of financial crisis.

Reuters reports:

The two-year-old program, which has been largely secret until now, is in addition to the "living wills" the banks crafted to help regulators dismantle them if they actually do fail. It shows how hard regulators are working to ensure that banks have plans for worst-case scenarios and can act rationally in times of distress.

The documents obtained by Reuters indicate that the Federal Reserve and the U.S. Office of the Comptroller of the Currency first directed the five big banks to design some realistic recovery plans back in May of 2010.

Such plans would need to be feasibly executed within three-six months following any disaster. Without plans in place, collapse would be imminent.

Recovery plans would vary from resolution plans – which are required under the 2010 Dodd-Frank financial reform law. “Living wills aim to end bailouts of too-big-to-fail banks by showing how they would liquidate themselves without imperiling the financial system.”

So far this summer, nine global banks have sent their living wills to the Fed and Federal Deposit Insurance Corp. Public portions of these documents have been released although they have not received much publicity at all.

Reuters was only able to get their hands on the names of the banks required to submit recovery plans through a Freedom of Information Act request.

In the meantime, experts remain deeply concerned with the potential of blow-ups at big banks resulting in another damaging dose of taxpayer bailouts.

Reuters adds:

Five years after the financial crisis, concerns remain about whether blow-ups at big banks could lead to another round of taxpayer bailouts. Trading losses have cost JPMorgan nearly $6 billion so far, and scandals such as the alleged rigging of an international interest rate benchmark have only highlighted the risks lurking inside big banks.

These disasters have damaged banks' reputations, but not their balance sheets. Most are still profitable, and in recent years the five banks have improved their capital bases and liquidity. They also have been subjected to annual Federal Reserve stress tests that measure whether the banks have sufficient capital to weather severe economic scenarios.

This past March, JPMorgan Chase had a recovery plan submitted and then a presentation was organized by Harvard Law School. At the time, the media was denied access to the event and related information. However, you can now see it online by clicking here.

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