Federal regulators on Wednesday told five banks, including Wells Fargo, to come up with a better plan for their own fast, orderly bankruptcy that won't sink the financial system or require a government bailout.
The Federal Deposit Insurance Corporation and Federal Reserve Board said the resolution plans — known as "living wills" — submitted by five of the nation's eight systemically important banks were "not credible." Reviews were mixed on the other three banks.
"No firm yet shows itself capable of being resolved in an orderly fashion through bankruptcy," Thomas Hoenig, vice chairman of the FDIC, said. "Thus, the goal to end too big to fail and protect the American taxpayer by ending bailouts remains just that: only a goal."
Bank of America, Bank of New York Mellon, JPMorgan Chase, State Street and Wells Fargo must address problems in their plans by Oct. 1 or face the possibility of stricter oversight, the FDIC and Federal Reserve said.
The failing grade for Wells Fargo came as a surprise, since the San Francisco-based bank submitted a plan that passed in 2014 and is not known for risky behavior. Regulators said the bank's resolution plan contained "material errors" that "undermine confidence in resolution planning preparedness," and demonstrated insufficient progress toward preparing itself for a breakup, both legally and operationally.
In a statement, Wells Fargo said it was "disappointed" by the results. The company operates Minnesota's largest bank with 171 branches and is also a major employer with 20,000 people in the state.
"We view the feedback as constructive and valuable to our resolution planning process," the bank's statement said. "We understand the importance of these findings and we will address them."
Minneapolis-based U.S. Bancorp, which runs the nation's fifth-largest bank, is not one of the eight banks considered "systemically important," and so is not required to submit a plan for orderly bankruptcy as part of the same process.
News that regulators rejected several of the living wills on Wednesday highlighted the difficulty of planning for another financial crisis and the complexity of determining whether a bank's plan is adequate.
Of the other three banks required to submit a living will, only Citigroup passed with both the Federal Reserve Board and the FDIC, though regulators identified "shortcomings" with that bank's plan.
Goldman Sachs failed with the FDIC and passed with the Federal Reserve. Morgan Stanley passed with the FDIC and failed with the Federal Reserve.
The living wills are required of bank holding companies with assets of $50 billion or more and nonbank financial companies picked out by the Financial Stability Oversight Council as part of the Dodd-Frank Act. The plans — along with stress tests and higher capital requirements — are considered by many a linchpin of a new, safer financial sector.
But given the complexity of financial companies, critics argue the whole proceeding is more charade than substance.
Anat Admati, a Stanford economist and fiery critic of the large banks, believes the companies under scrutiny are far too vast and complex to ever credibly understand — let alone explain — all the scenarios by which they would collapse.
"They can't tell me the thousands of ways that they can fail that won't cause harm," she said in Minneapolis earlier this month at the Minneapolis Fed's first forum on the risks at the nation's large banks. "They can't. They're much bigger than Lehman. Lehman didn't work very well. It's not possible. This test is ridiculous."
Still, if any of the five firms with deficient plans don't fix their problems by Oct. 1, they could face stricter leverage or liquidity requirements and restrictions on growth. If, after two more years, a firm still has failed to fix the problems in its plan, regulators could force it to break up.
Regulators also said Wednesday they're still looking at the plans for the four foreign banks that filed resolution plans on July 1, 2015 — Barclays PLC, Credit Suisse Group, Deutsche Bank AG and UBS.
Adam Belz • 612-673-4405 Twitter: @adambelz
