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Saturday August 11, 2012

US banks told to take steps to prevent collapse


CHARLOTTE: US regulators directed five of the country's biggest banks, including Bank of America Corp and Goldman Sachs Group Inc, to develop plans for staving off collapse if they faced serious problems, emphasising that the banks could not count on government help.

The two-year-old programme, which has been largely secret until now, is in addition to the “living wills” the banks crafted to help regulators dismantle them if they actually do fail. It shows how hard regulators are working to ensure that banks have plans for worst-case scenarios and can act rationally in times of distress.

Officials like Lehman Brothers former chief executive Dick Fuld have been criticised for having been too hesitant to take bold steps to solve their banks' problems during the financial crisis.

According to documents obtained by Reuters, the Federal Reserve and the US Office of the Comptroller of the Currency first directed five banks which also include Citigroup Inc, Morgan Stanley and JPMorgan Chase & Co to come up with these “recovery plans” in May 2010.

They told banks to consider drastic efforts to prevent failure in times of distress, including selling off businesses, finding other funding sources if regular borrowing markets shut them out, and reducing risk. The plans must be feasible to execute within three to six months, and banks were to “make no assumption of extraordinary support from the public sector,” according to the documents.

Recovery plans differ from living wills, also known as “resolution plans,” which are required under the 2010 Dodd-Frank financial reform law. Living wills aim to end bailouts of too-big-to-fail banks by showing how they would liquidate themselves without imperilling the financial system.

“Recovery plans are about protecting the crown jewels,” said Paul Cantwell, a managing director at consulting firm Alvarez & Marsal. “It's about, How do I sell off non-core assets?' The priority is to the shareholders. A resolution plan is about protecting the system, taxpayers and creditors.”

The recovery plans are being used as part of regulators' ongoing supervisory process. In Britain, recovery and resolution plans have both been part of the living will requirements for large banks.

Mike Brosnan, senior deputy comptroller for large banks at the OCC, said the regulator continuously evaluated contingency planning at the banks and savings associations it supervised.

“Recovery plans required of the largest banks are helpful in ensuring banks and regulators are prepared to manage periods of severe financial distress or instability affecting the banking sector,” he said.

This summer, nine global banks submitted living wills to the Fed and Federal Deposit Insurance Corp, and regulators released the public portion of the documents.

The recovery plans requested in 2010 have received little publicity. The names of the banks required to submit them have not been previously disclosed, and Reuters obtained them only through a Freedom of Information Act request.

The Fed supplied Reuters with the letters requesting plans from banks, but not the banks' actual plans because they were deemed confidential supervisory information. The regulator said it was withholding 5,100 pages of information. Reuters

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