Banks’ Living Wills Pronounced Dead on Arrival


Last week, U.S. regulators essentially pronounced the so-called Living Wills of five of the eight largest financial institutions (Bank of America, Bank of New York Mellon, JP Morgan Chase, State Street, and Wells Fargo), dead on arrival. The other three (Goldman Sachs, Morgan Stanley and Citigroup) fared better, because their plans escaped being termed “not credible”. (While Goldman’s plan was green-lighted by the Fed, the FDIC found problems and with Morgan Stanley, it was the other way around. Citigroup won provisional approval from both regulators, but must address “shortcomings” in its plans.) Considering that not one bank got a full-blown thumbs up as to how it would wind itself down amid a bankruptcy, without taking down the system, without the assistance of taxpayers or without addressing shortcomings, they are still too big to fail. However, this does not mean that the banks are in the same precarious state that they were in 2008-2009; rather their “break the glass” emergency plans are not yet strong enough to convince both the Fed and the FDIC that they would be able to unwind themselves without destabilizing the system.

Background: Before the financial crisis regulators had not properly monitored or constrained risk-taking at the nation’s largest firms. When the crisis hit, the government “did not have the tools to break apart or wind down a failing financial firm without putting the American taxpayer and the entire financial system at risk.”

To prevent that from happening in the future, a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act required that large banks (total consolidated assets of $50B or more) submit plans to both the Federal Reserve and the Federal Deposit Insurance Corporation as to how they would navigate a bankruptcy without taking down the entire financial system and with no taxpayer bailout. The goal was “If a firm fails in the future it will be Wall Street – not the taxpayers – that pays the price.”

These plans are known as “living wills”—and just like an end of life directive on which the name is based, they must contemplate what would occur under the worst circumstances. Each bank is required to describe its strategy for rapid and orderly resolution in the event of material financial distress or failure of the company.

What happens next? Although the annual filing deadline is July 1, 2017 the institutions must resubmit updated plans by this October. If any of them fail, they could face higher capital, leverage or liquidity requirements; or potentially might have to exit certain businesses entirely. Meanwhile, financial company shareholders did not seem especially worried about the living will issue: amid weak earnings releases from J.P. Morgan, Bank of America and Wells Fargo, bank stocks gained 7 percent on the week. 


  • DJIA: 17,897 up 1.8% on week, up 2.7% YTD
  • S&P 500: 2080 up 1.6% on week, up 1.8% YTD
  • NASDAQ: 4938 up 1.8% on week, down 3.1% YTD
  • Russell 2000: 1131, up 3% on week, down 0.4% YTD
  • 10-Year Treasury yield: 1.75% (from 1.872% a week ago)
  • May Crude: $40.40, up 1.6% on week
  • June Gold: $1,234.60, down 0.8% on week
  • AAA Nat'l avg. for gallon of reg. gas: $2.11 (from $2.04 wk ago, $2.41 a year ago)

THE WEEK AHEAD: The world’s major oil producers will meet in Doha on Sunday. Analysts expect the announcement of a deal that would freeze OPEC and Russian oil output at current high levels. However, it would not likely reduce excess supply without a pick-up in demand or supply cuts by non-OPEC producers.

Mon 4/18:

Morgan Stanley, Netflix, Pepsi, IBM

10:00 Housing Market Index

Tues 4/19:

Goldman Sachs, Intel, Johnson & Johnson, Yahoo

8:30 Housing Starts

Weds 4/20:

Abbott Labs, AMEX, Coca-Cola, Mattel, Yum! Brands

10:00 Existing Home Sales

Thursday 4/21:

Alphabet, Microsoft, Starbucks, Verizon, Visa

8:30 Philly Fed Business Outlook Survey

8:30 Chicago Fed National Activity Index

8:30 FHFA Home Price Index

Friday 4/22:

American Airlines, General Electric, Caterpillar, McDonald’s, Schlumberger