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Hoenig: Living will process 'unrealistic'

StreetTalk – Episode 69: Banks left with pockets full of cash and few places to go

Street Talk – Episode 69: Banks left with pockets full of cash and few places to go

Street Talk Episode 68 - As many investors zig away from bank stocks, 2 vets in the space zag toward them

Street Talk Episode 66 - Community banks tap the debt markets while the getting is good


Hoenig: Living will process 'unrealistic'

FDICVice Chairman Thomas Hoenig wasted no words in his assessment of the latestliving will plans from big U.S. banks: too-big-to-fail remains a problem.

In astatement released April 13, Hoenig said some banks have made progress butoverall "no firm yet shows itself capable of being resolved in an orderlyfashion through bankruptcy."

"Thus,the goal to end too big to fail and protect the American taxpayer by endingbailouts remains just that: only a goal," he added.

Hoenig'sremarks came after news that the Federal Reserve and FDIC found the 2015resolution plans submitted by Bankof America Corp., Bank of New York Mellon Corp., , and were"not credible or would not facilitate an orderly resolution under the U.S.Bankruptcy Code." The regulators found weaknesses in the resolution plansof Goldman Sachs GroupInc. and MorganStanley that the companies must address, but only one of the tworegulators determined there was a deficiency in each of their plans. 's resolution planwas found to have shortcomings that it must address, but neither regulatorfound the plan to be "not credible."

In a statement, FDIC Chairman Martin Gruenberg called theregulators' actions "a significant step forward in the use of the livingwill authority to require systemically important financial institutions todemonstrate they can fail in an orderly way under bankruptcy at no cost totaxpayers."

Hoenig,on the other hand, called the living will process "unrealistic"because it assumes that individual global systemically important banks couldwithstand the shock resulting from another GSIB failing. "Ironically andunfortunately there is little margin of error for these most systemicallyimportant firms, and the market knows this. This factor adds enormously to thedifficulty of making bankruptcy successful," he said.

The FDICvice chairman also voiced concerns about guidance regulators provided for thenext living will submissions — stating that the resolution plan methodology isnot required to produce aggregate losses that are greater than the amount ofexternal total loss-absorbingcapacity, or TLAC, that would be required of GSIBs under aproposed Fed rule.

Hoenig called this aspect of the guidance "highly questionablesince regulators cannot administratively control future losses, and this statementappears designed to assure that losses do not undermine the on-paper success ofthe [single-point-of-entry] solution." He recommended removing thisstatement from the guidance.