July 5, 2012
Bank Wills Aren't Too-Big-to-Fail Cure
By DAVID REILLY
Crises just don't play out this way.
When big banks crafted so-called living wills, they assumed a financial firm would suffer the equivalent of a house fire, not a conflagration. The banks did so at the behest of regulators, who told them to envision a scenario in which just their own institution ran into trouble, the financial system didn't face a meltdown and funding markets continued working. The more likely outcome is that trouble at one big bank wouldn't be an isolated event.
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Granted, this was just a first stab at seeing to it that big banks can be wound down. Nine banks were required to submit the first living wills at the end of last month, including the biggest U.S. institutions—J.P. Morgan Chase, JPM -0.28%, Bank of America, BAC +0.12%, Citigroup, C +0.69%, Goldman Sachs Group and Morgan Stanley MS +1.14%—as well as some foreign banks.
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Regulators released a public portion of the wills late Tuesday, although these provided little new information beyond financial filings; more detailed parts were kept confidential.
.Future iterations of the wills are likely to be based upon the idea of further-reaching trouble within the financial system. Still, the narrow basis for the current ones shows this is far from being a cure for the threat posed by too-big-to-fail banks.
.The danger is that investors, and banks, allow themselves to be lulled by such nascent planning into thinking the problem is subsiding. In its will, for example, Citigroup asserted that having bolstered its capital and liquidity, "it is unlikely that the resolution of Citi will ever be required."
.That's bold talk given Citi required $52 billion in taxpayer assistance during the crisis. Investors, and taxpayers, need more than heady assertions and wills to be convinced it won't happen again.
When big banks crafted so-called living wills, they assumed a financial firm would suffer the equivalent of a house fire, not a conflagration. The banks did so at the behest of regulators, who told them to envision a scenario in which just their own institution ran into trouble, the financial system didn't face a meltdown and funding markets continued working. The more likely outcome is that trouble at one big bank wouldn't be an isolated event.
.
Granted, this was just a first stab at seeing to it that big banks can be wound down. Nine banks were required to submit the first living wills at the end of last month, including the biggest U.S. institutions—J.P. Morgan Chase, JPM -0.28%, Bank of America, BAC +0.12%, Citigroup, C +0.69%, Goldman Sachs Group and Morgan Stanley MS +1.14%—as well as some foreign banks.
.
Regulators released a public portion of the wills late Tuesday, although these provided little new information beyond financial filings; more detailed parts were kept confidential.
.Future iterations of the wills are likely to be based upon the idea of further-reaching trouble within the financial system. Still, the narrow basis for the current ones shows this is far from being a cure for the threat posed by too-big-to-fail banks.
.The danger is that investors, and banks, allow themselves to be lulled by such nascent planning into thinking the problem is subsiding. In its will, for example, Citigroup asserted that having bolstered its capital and liquidity, "it is unlikely that the resolution of Citi will ever be required."
.That's bold talk given Citi required $52 billion in taxpayer assistance during the crisis. Investors, and taxpayers, need more than heady assertions and wills to be convinced it won't happen again.
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