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Goldman Sachs, Morgan Stanley seek to remedy weaknesses in 'living wills'

Goldman SachsGroup Inc. and MorganStanley have issued revisions to their "living wills" in responseto shortcomings regulators found in the banks' submissions in July 2015.

The resolutionplans, which envision the sale or wind-down of all subsidiaries ifthe parent company is forced to declare bankruptcy during a financial crisis,were created in accordance with provisions of the Dodd-Frank Act that apply tosystemically important financial institutions.

In April, when regulators issued feedback on the largest U.S. banks' resolutionplans, Goldman and Morgan Stanley were designated as having weaknesses inspecific parts of their plans. The FDIC found Goldman's plan to be not crediblewith a deficiency in governance mechanisms, while the Federal Reserve found MorganStanley's plan not credible with a deficiency in liquidity.

Goldman outlined six actions it has taken to address theweaknesses identified: an enhanced liquidity model; new analysis of thepathways to wind down derivatives portfolios; a new framework of triggers andplaybooks that would enact funding and capitalization of subsidiaries; analysisof possible legal obstacles to the parent company providing financial supportto some subsidiaries; a new "bankruptcy playbook" for first-day andemergency actions; and a draft emergency motion to be used in bankruptcy courtto support the bank's request for support.

Morgan Stanley also outlined a new liquidity model toestimate and maintain sufficient liquidity for its subsidiaries. The bank alsosaid it is "fundamentally changing" how it manages cash to reduce oreven eliminate the amount of cash that might not be available to subsidiariesif the parent company fails. The bank also noted that it is developing aplaybook to guide how it should communicate with rating agencies to help itmaintain high credit ratings during a resolution. An enhanced trigger frameworkis also being put in place to ensure that support to subsidiaries is directlytied to the parent company's bankruptcy filing.

While the Fed and the FDIC did not make a jointdetermination regarding Goldman's and Morgan Stanley's plans, they jointly didnot find the living wills of JPMorgan Chase & Co., , , and tobe credible. Citigroup Inc.'splan received no deficiencies, but some weaknesses were still found.