Photograph by Anadolu Agency — Getty Images
By Geoffrey Smith
March 24, 2015

Seven years after Lehman Brothers Inc. went under, the Federal Reserve still doesn’t believe it can wind down three of the largest international banks on U.S. soil safely if they were to collapse.

The Fed sent notices Monday to HSBC Holdings Plc (HSBC), BNP Paribas SA (BNPQY) and Royal Bank of Scotland Plc (RBSPF) to tell them that the contingency plans that they submitted to the Fed detailing how they could be resolved in a crisis still have “specific shortcomings” that need to be addresses.

Such resolution plans, also known as ‘living wills’, have been made a routine requirement for large banks since the collapse of Lehman exposed how many banks were ‘too-big-to-fail’. Now that the Fed and foreign regulators have largely succeeded in forcing banks to hold much higher levels of capital against potential losses, it’s resolution planning, along with conduct-related issues such as money-laundering and market manipulation, that are now at the top of the regulatory agenda.

Each bank has to be able to persuade the Fed that, if it fails, it can be wound down without the need for taxpayer-funded resources to keep the financial system steady. That’s a tall order given the size and complexity of banks as large as HSBC and BNP Paribas.

The Fed said that the plans submitted by the three banks for last year were based on “unrealistic or inadequately supported assumptions about the likely behavior of customers, counterparties, investors” and other key players such as the exchanges and clearing houses that manage their multi-billion dollar derivatives trades.

The Fed also fretted that the three banks hadn’t paid enough attention to their degree of interconnection with the rest of the financial sector, thus underestimating the risk of contagion from a liquidity crisis.

The Fed and the Federal Deposit Insurance Corporation said in a joint statement that the three banks have to correct the shortcomings in their plans when they submit their plans for this year.

If the regulators still aren’t satisfied by this year’s plans, the Dodd-Frank act gives them the power to impose tighter capital and liquidity requirements on the banks concerned, as well as to restrict their operations, up to and including forcing them to sell off assets and businesses.

A spokesman for BNP declined to comment, while no-one at HSBC or RBS was immediately reachable.

All three banks have had various run-ins with U.S. regulators over the last year, with BNP being hit particularly hard by an $8.8 billion fine for helping Iran, Sudan and others to get round U.S. sanctions.

RBS, which is still majority owned by the British-taxpayer after its bailout in 2008, is currently trying to pare down its operations both in the U.S. and other foreign markets. On Monday it announced that it would sell down its stake in Citizens Financial Group (CFG) to below 50%, hoping to raise up to $3.3 billion.

Shares in Providence, R.I.-based Citizens have risen over 15% since RBS floated a first tranche in September last year.

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