WASHINGTON — Nine major banks are putting the final touches on so-called “living will” plans that they are due to submit to federal regulators this weekend.
The nine banks leading the process — Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley and UBS — are due to submit their plans, suspected to be thousands of pages long, to the Federal Reserve and the Federal Deposit Insurance Corp. by Sunday.
The documents are required as part of the Dodd-Frank bank reform law and aim to tame the complexities of the big banks’ operations. A bailout by the federal government, along the lines of how American International Group AIG +4.12% was rescued in the days after Lehman Brothers’ collapse, is now barred by law. Banks with total assets of $50 billion will submit a hypothetical contingency plan, outlining their detailed steps in the event of financial failure.
The plans must be divided into public and confidential sections. The outlined contingency plan may alter how banks choose to invest, according to Michael Bleier, partner in the financial regulatory practice at Reed Smith LLP, a Washington law firm.
“Before you would just focus on what this company will add to my mix of businesses. Now you have to take into consideration how I hand this company off if I have to in a worst-case scenario,” said Bleier. “That will potentially impact your negotiations with someone. It just really does change the dynamic in the context of acquisitions and mergers.”
Following Sunday’s first round of submissions, the FDIC and Federal Reserve will first release the public section on Tuesday. The reviewal of the living will documents will take place over 60 days, in which the regulators will determine if the plan complies with outlined rules.
“One of the problems, and we’re seeing a bit of this in Europe right now, is the contagion,” said Jim Sinegal, an analyst with Morningstar Inc.
Sinegal referenced a J.P. Morgan draft presentation in March that illustrates a hypothetical contingency plan the firm would take to avoid failure and steps to take in the event of failure. (See external link to presentation.)
“The J.P. Morgan presentation was much like an ordinary bankruptcy, but one of the biggest problems in the initial days of a financial crisis is that an actual shutting down of J.P. Morgan would make people so nervous about other banks that they still pull out.”
There have always been plans to take over big banks, Sinegal says. But living wills might make things a little easier.
“I don’t know if these wills will actually do much,” said Sinegal. “But no one wants to be on the wrong side of the regulators at this point. If you submit a faulty plan, it could really affect the value of the company.”
Faulty assumptions are an additional issue, Bleier said.
“These assumptions can include [estimated] earnings, revenue stream and dividends they’re going to pay. If there is an issue with an underlying assumption it can totally change the model that an institution is working with, so the utility and value of the whole living will is very questionable. If a major assumption is even a little bit off, it can really put into question the merits and accuracy of that living will,” said Bleier.
According to FDIC rules, 125 banks will be required to submit plans by the end of 2013. The plans will undergo numerous revisions and yearly upkeep, costing the banks time and money in an attempt to disentangle their operations.