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Regulators Set to Reject ‘Living Wills’ of Many Big U.S. Banks

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J.P. Morgan CEO Jamie Dimon Photograph by David A. Grogan — CNBC/NBCU Photo Bank via Getty Images

U.S regulators are preparing to notify some of the country’s largest banks, including JPMorgan Chase, that they have submitted flawed “living wills,” the Wall Street Journal reported on Tuesday, citing people familiar with the matter.

A “living will” refers to a bank’s plan for how it would wind down operations during a crisis without the help of public money.

At least half of the eight U.S. banks labeled “systemically important,” meaning they could significantly damage the American financial system if they encountered distress, are expected to receive “harsh verdicts” on their plans for how they would handle a potential bankruptcy without a federal bailout, the Journal reported.

The Federal Deposit Insurance Corporation and the Federal Reserve, the two regulators reviewing the wills, declined to comment to Reuters on the report. Reuters was unable to verify the story.

Under the Dodd-Frank Wall Street reform law, banks must submit the plans annually. Banks that submit plans that regulators do not find credible can face higher capital requirements and stricter regulation.

 

Also on Tuesday, the Government Accountability Office released a report saying that big banks do not have enough information on how U.S. regulators evaluate their plans to wind down operations during a crisis without the help of public money—i.e., their “living will”—and are scrambling to meet annual deadlines for filing them.

The nonpartisan agency, which audits federal programs and offices, said that the U.S. Federal Reserve and the Federal Deposit Insurance Corp “have not disclosed their frameworks for determining whether a plan is not credible.”

The requirement for a so-called living will was part of the Dodd-Frank Wall Street reform legislation passed in the wake of the 2007-2009 financial crisis, when the U.S. government spent billions of dollars on bailouts to keep big banks from failing and wrecking the U.S. economy.

Banks that submit living wills that the two regulators do not find credible can face higher capital requirements and stricter regulation.

“Without greater disclosure, companies lack information they could use to assess and enhance their plans,” the GAO said in its report. “The regulators view such information as confidential, but a federal directive on open government recognizes that transparency promotes accountability by providing more information on government activities.”

The GAO said the lack of information “could undermine public and market confidence in resolution plans.”