Fed, FDIC tell banks their bankruptcy plans ‘are not credible’

August 5, 2014, 11:28 PM UTC

U.S. regulators have asked a group of 11 banking giants to resubmit plans, or living wills, meant to ensure that they could enter bankruptcy without triggering a massive fiscal crisis.

On Tuesday, the Federal Reserve and the Federal Deposit Insurance Corporation said they had identified “specific shortcomings” in the plans submitted by each of the banks and that they “are not credible and do not facilitate an orderly resolution under the U.S. Bankruptcy Code.” The strong wording came in notes released by the regulators commenting on the second drafts of the banks’ bankruptcy plans following their initial submissions in 2012.

The banks were told that they need to make “significant progress” before another wave of submissions are due July 1 of next year (Bloomberg noted that the banks actually submitted their third round of plans earlier this year, though the government’s response on Tuesday relates only to last year’s submissions).

The 2010 Dodd-Frank Act empowered the Fed and the FDIC to require large financial institutions to submit bankruptcy plans for evaluation. The idea is to save taxpayers from having to bail them out of a crisis.

The regulators did not identify which specific issues each bank’s plan had. But in general, they noted in their release that the banks need to establish less complex legal structures and develop operational structures that can better handle a crisis. The agencies added that the banks’ plans make unrealistic “assumptions about the likely behavior of customers, counter-parties, investors, central clearing facilities, and regulators.”

The 11 banks in the first group of filers are Bank of America, Bank of New York Mellon, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street Corporation and UBS.

As Fortune has reported, the Government Accountability Office recently put out a report showing that the perception, among lenders, of the largest banks being “too big to fail” has declined, but not been eliminated, in recent years.

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