The Federal Reserve and the Federal Deposit Insurance Corp. appear to be satisfied with their efforts to equip the most systemic U.S. banking organizations with a strategy for rapid and orderly resolution under bankruptcy.
The regulators passed the resolution plans, or "living wills," of all eight U.S. megabanks Dec. 19, saying the submissions were "reflecting the significant progress made in recent years."
With approved living wills, the global systemically important banks, or G-SIBs, are taking yet another step forward in proving to regulators that they would be prepared to weather another financial crisis. In June, the Fed cleared all 34 banking companies subject to the Comprehensive Capital Analysis and Review process of their capital plans, giving the largest U.S. banks the green light to pursue share buybacks, dividend hikes, or reinvestment.
Arthur Wilmarth, law professor at the George Washington University Law School, said in an interview that the regulatory approval of the megabanks' living wills aligns with incoming Fed Chair Jerome Powell's comments noting that no banks are currently "too big to fail."
"[The living wills] seem to reflect a sort of 'mission accomplished' perspective," Wilmarth said.
Although the Fed and the FDIC approved the megabanks' work on modifying their corporate structures to cleanly distribute losses across investors, the regulators said there is still room for improvement. The regulators highlighted four areas to further improve resolvability: intra-group liquidity; internal loss-absorbing capacity; derivatives; and payment, clearing, and settlement activities.
"There are inherent challenges and uncertainties associated with the resolution of a systemically important financial institution," the agencies wrote.
The regulators also flagged four of the eight megabanks for "shortcomings." Wells Fargo & Co. and Goldman Sachs Group Inc. were both advised to improve their separability analyses related to divestiture options, Morgan Stanley was called out for weakness in its legal entity rationalization plan, and Bank of America Corp. was advised on issues in derivatives and trading activity.
Wells Fargo said in a statement that it is "pleased" that the regulators found no deficiencies and promised to "dedicate significant resources across the company" to further improve its resolvability.
Citigroup Inc., Bank of New York Mellon Corp., JPMorgan Chase & Co. and State Street Corp. were cleared as having no specific shortcomings.
"Ensuring that Citi can be resolved without the use of taxpayer funds and without adverse systemic impact is critical to being recognized as an indisputably strong and stable institution," Citi CEO Michael Corbat said in a statement.

In 2015, large bank resolvability appeared to be very much a work in progress. Wells Fargo, Bank of America, Bank of New York Mellon, JPMorgan Chase and State Street were singled out for deficiencies and were required to resubmit their living wills. Wells Fargo fumbled its resubmission, leading regulators to briefly bar the bank from setting up any bank entities abroad or purchase any nonbank subsidiaries until the company corrected its issues, which it did in April 2017.
Outgoing Fed Chair Janet Yellen said Dec. 13 that large banks have all made progress on showing that they can be successfully resolved in stress. With Powell coming in, it remains to be seen how aggressively the Fed will push for further work on living wills now that the largest U.S. banks have a relatively clean bill of health.
But critics have argued that the living will process is not the best way to assure an orderly bankruptcy. FDIC Vice Chairman Thomas Hoenig has argued that resolution planning assumes that a G-SIB would be able to withstand the systemic shock of the failure of another G-SIB, which he described as "unrealistic" given the interconnectedness of the banking industry.
"Thus, the goal to end too big to fail and protect the American taxpayer by ending bailouts remains just that: only a goal," Hoenig said.
