America’s Big Banks Still Can’t Figure Out How to Save Themselves

April 15, 2016, 5:11 PM UTC
Markets React To JPMorgan Chase Reporting 2 Billion Dollar Loss
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The boards of directors of eight behemoth U.S. banks are in hot water.

The Federal Reserve or the FDIC (and in some cases, both) have determined that Bank of America (BAC), Bank of New York Mellon (BK), Goldman Sachs (GS), J.P. Morgan (JPM), Morgan Stanley (MS), State Street (STT), and Wells Fargo (WFC) have failed to produce “credible” crisis plans, despite some progress by all the banks. In their announcement on Wednesday, regulators agreed that Citigroup’s (C) plan also had shortcomings, but overall, its flaws were less severe.

The reason this matters to you and me is that these eight banks are deemed to be “systemically important” (i.e. if one or more of them fail, it could bring the economy to its knees just as we experienced in the Great Recession).

The regulators’ analyses specifically cited governance among the weaknesses in the plans of seven of the banks (not Bank of New York Mellon’s). The criticisms included, among other problems, inadequate board of directors’ “playbooks” and lack of detail regarding what specific actions the boards would take and when.

These assessments don’t come at the best time for the boards. Shareholders will be voting their proxies over the next few months, making their voices heard on the boards’ nominees and on shareholder proposals.

So who on the banks’ boards are responsible for oversight of these less-than-adequate crisis plans (also technically known as resolution plans or living wills)?

According to their latest proxies, the boards of Citi and Morgan Stanley have assigned oversight responsibility for the plans to their boards’ risk committees, and the board of Wells Fargo has given the chore to its audit committee. It’s disturbing that the other banks haven’t clearly disclosed in their proxies who on the board is in charge. A Bank of New York Mellon spokesperson wrote me in an email that their “resolution and recovery process involves full Board review and approval.” The other four banks’ spokespeople did not respond to queries requesting information on their board processes and whether a specific committee is in charge.

In addition to registering their displeasure by voting thumbs up or down on individual board members, shareholders at Citi and J.P. Morgan will have the chance this year to vote on a shareholder proposal asking the board to form a committee to study a possible break-up of the bank. In the proxy, Citi has recommended a no vote saying the Board has considered “alternative strategic options for the Company.” A spokesperson declined to comment further on the analyses and what if anything they revealed, positively or negatively, about a possible break-up scenario.

J.P. Morgan, in rejecting the shareholder proposal, to its credit, shares more information. According to the proxy and a Feb. 24, 2015 investor presentation, “execution risk” (i.e. the ability to actually get it done and to keep existing talent) is one of the primary reasons to reject a “separation scenario.”

But this is backwards. One of the purposes of the living will is to create a plan to dissolve parts of the bank if need be. And part of the rigor behind building the crisis plan is to simplify the organization to make this possible. But without sufficient existing talent, it is impossible to build the plan and then make it happen.


Regulators won’t have to wait long to assess whether this execution risk is diminishing. They’ll be receiving new plans from J.P. Morgan and four of the other banks October 1. In statements for this article and in press releases, the banks emphasized that progress has been made, that the process was iterative, and that that they were committed to working with regulators to fix their plans.

There’s a song in the musical Sound of Music that includes the lyrics “How do you solve a problem like Maria?… She’s always late for everything except for every meal.” And something all the singers agree on, “Maria’s not an asset to the abbey.”

Similarly, some regulators and average citizens are losing patience with the largest banks, judging that the giants may just be irresponsible as a matter of character. One thing seems certain: The largest banks represent too big a potential liability to ignore.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (, an independent board education and advisory firm she founded in 1999. She has been a regular contributor to Fortune since April 2010 and has advised analysts, regulators, shareholders, and banks of every size on the economics of financial services.

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