Forum Post: Fed & Bank Relationships Starting to Strain
Posted 9 years ago on Aug. 6, 2014, 8:09 a.m. EST by turbocharger
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The threesome of Washington, the banks, and the Fed is starting to unravel, now with the Fed openly criticizing the banks in an attempt to save their own ass when rates start to go up.
DC, as usual, is completely useless.
money must be circulated in the system for the exchange of goods and services so the people may survive and prosper.
exactly ... today's economy is solely defined by activity ... doesn't matter whether the activity is corrupt or abusive... that is why (what I used to call Social Capital) but is now accepted as Social Wealth ... is gaining support as a true economic indicator
By RYAN TRACY, VICTORIA MCGRANE and CHRISTINA REXRODE CONNECT Updated Aug. 5, 2014 7:17 p.m. ET WASHINGTON—In a sweeping rebuke to Wall Street, U.S. regulators said 11 of the nation's biggest banks haven't demonstrated they can collapse without causing damaging economic repercussions and ordered them to try again.
The Federal Reserve and the Federal Deposit Insurance Corp. said bankruptcy plans submitted by big banks make "unrealistic or inadequately supported" assumptions and "fail to make, or even to identify, the kinds of changes in firm structure and practices that would be necessary to enhance the prospects for" an orderly failure.
The regulators raised the specter of slapping banks with tougher rules on capital and leverage or restrictions on growth—and even eventually forcibly breaking them up—should they fail to make significant progress to address the shortcomings by July 2015.
Related Heard on the Street: Fed Shreds Big Banks' Wills The findings applied to 11 banks with assets greater than $250 billion, including Bank of America Corp. BAC +0.53% , Bank of New York Mellon Corp. BK +0.21% , Citigroup Inc., C +0.81% Goldman Sachs Group Inc., GS +1.87% J.P. Morgan Chase JPM +0.77% & Co., Morgan Stanley, MS +1.88% State Street Corp. STT +0.96% , and the U.S. units of Barclays BARC.LN +0.37% PLC, Credit Suisse Group AG CSGN.VX +0.74% , Deutsche Bank AG DBK.XE -0.12% , and UBS AG UBSN.VX +2.21% . The firms all received letters detailing shortcomings in their so-called "living wills."
"Despite the thousands of pages of material these firms submitted, the plans provide no credible or clear path through bankruptcy that doesn't require unrealistic assumptions and direct or indirect public support," said Thomas Hoenig, the No. 2 official at the FDIC, in a statement.
Representatives of banks declined to comment or had no immediate comment Tuesday. The Financial Services Forum, a big bank trade group, said banks are safer now than before the crisis and "the industry remains strongly committed to ensuring the financial system is less complex, safe, transparent, accountable and capable of fulfilling its role of promoting economic growth and weathering substantial stress scenarios without taxpayer dollars being at risk."
The rebuke is almost certain to fuel the debate over whether some firms remain "too big to fail"—or so big their collapse would make government support necessary to avert broad economic damage. It will likely feed the appetite of some lawmakers to push for more aggressive action to force structural changes at the biggest banks.
"Too big to fail is alive and well. The FDIC's statement that these living wills are not credible means that megabanks will live on taxpayer life support in the event of a crash," said Sen. Sherrod Brown (D., Ohio), who has proposed legislation to sharply increase capital requirements for the biggest banks, in a statement. He said regulators should use their authority to impose "much higher" capital and leverage rules "sooner rather than later."
The 2010 Dodd-Frank law required banks to submit an annual "living will" detailing their operations and exposures as well as how they could be dismantled without relying on government support in the event they reach the brink of failure. The requirement was put in place in the wake of the 2008 financial crisis, when regulators struggled to understand the sprawling operations of teetering financial giants such as American International Group and Lehman Bros.
To avoid being hit with tougher rules—or even being required by regulators to break up the company—banks can take steps to make their bankruptcy plans more credible, regulators said Tuesday. These include "establishing a rational and less complex legal structure;" showing they can quickly produce reliable information about their exposures, and amending derivatives contracts to make them easier to bring through bankruptcy.
Only if a bank failed for years to make such changes would regulators conclude that it should be forced to restructure, a Fed official said Tuesday. At that point, the official said, the agencies might seek divestitures that would simplify the firm rather than breaking it up.
Analysts said firms are likely to focus on steps such as reducing the number of legal entities within the bank and making their businesses less complex.
"It's an extraordinarily challenging exercise" for banks, especially those with large trading books and exposure to many different counterparties, said Nomura analyst Steven Chubak.
Regulators didn't release details about deficiencies at individual firms Tuesday. Certain banks' plans have made more progress than others, regulatory officials said on a conference call with reporters.
For months, banks have been asking regulators for specific feedback about their living wills, which they have filed each year since 2012. The banks, which have already submitted their 2014 plans, received no formal individual feedback on any of their submissions until Tuesday.
"The serious problem is that these banks have had no feedback of any material sort" since sending regulators their 2013 living wills last year, said Rodgin Cohen, senior chairman of law firm Sullivan & Cromwell LLP. "It just continues to widen this gulf between the banks and the regulators in terms of communication."
Part of the delay stemmed from internal debates at the Fed and FDIC about how to respond to firms whose resolution plans may be deficient, people familiar with those discussions have said.
On Tuesday, the FDIC was ready to deal out harsher medicine than the Fed, voting unanimously to find the 11 banks' plans "not credible." The Fed's governing board, headed by Fed Chairwoman Janet Yellen, agreed to order banks to improve their plans but stopped short of using that language. The agencies must agree to call plans "not credible" in order to trigger a legal requirement that a firm immediately resubmit a revised plan and face stiff penalties if regulators remain unconvinced of its feasibility.A Fed official said Tuesday that, while the wording of the findings was different, the agencies agreed to take strong action.
Many observers doubt that the nation's biggest banks—some with assets greater than $1 trillion—could be put through bankruptcy without broad, negative repercussions. Regulators themselves still haven't figured out their backup plan: The Fed and the FDIC have endorsed a strategy for preventing panic by keeping a firm's subsidiaries open while allowing its holding company to fail, but key pieces of that plan remain incomplete.
"I call them regulatory opiates," Ken Thomas, a Miami-based bank consultant and economist, said of the living wills. "They make the regulators feel good, they make Congress feel good, but what they don't realize is in the real world, things happen instantaneously, and the time to enact a living will— it doesn't exist."
"To sit there and try to come up with a plan to try to orderly unwind a major institution of this size, I don't know if it can be done," said Paul Miller, an analyst at FBR Capital Markets and former Fed examiner.
""I call them regulatory opiates," Ken Thomas, a Miami-based bank consultant and economist, said of the living wills. "They make the regulators feel good, they make Congress feel good, but what they don't realize is in the real world, things happen instantaneously, and the time to enact a living will— it doesn't exist.""
Good points
funny how it seems the Federal Reserve is no-longer working under the banks ? ...
well thank god. our government based on those that can pay taxes
people without money deserve no say in the government