What Citigroup’s ‘Living Will’ Win Means for Big Banks
Five big banks’ living wills were deemed to be not credible by regulators; that Citi passed is significant
By John Carney
That is a big difference. And it is an especially important one given that the living-will process gives regulators extraordinary powers that ranging from requiring a firm to hold more capital to the ability to effective force a breakup. Regulators won’t be rash to embrace the nuclear option, but banks and investors shouldn’t forget that it exists.
More immediately, the resolution process is viewed by regulators as a tool to require changes in real time to the basic structures and operations of the biggest banks. Which means it is likely a mistake to think banks that failed this time just need to spend more money putting together more persuasive or comprehensive plans.
Keep in mind that even Citi didn’t exactly pass with flying colors. Regulators cited shortcomings in governance, assumptions about the bank’s ability to hedge portfolio risk and estimating liquidity needs during resolution. They officially put Citi on notice that failure to address these shortcomings could land them in the penalty box next time around.
In other words, regulators intend to tighten the screws over time—just as they have with the stress tests. Each year, getting regulatory approval will likely become incrementally more difficult. Passing now isn’t a guarantee of passing forever. The plans of at least some of the banks that failed lack credibility because, as currently structured, they can’t be resolved through bankruptcy. Regulators aren’t just asking for better plans. They are demanding better—more resolvable—banks.