The Federal Deposit Insurance Corp. (FDIC) entails the nation's largest banks to outline ways to liquidate by breaking up and selling off assets if these are on the verge of collapsing. The resolution plans or so-called ‘living wills’ are required in a bid to reduce risks of further bailouts, should these banks sink in the event of another financial crisis.
On Tuesday, the FDIC board voted in favor of living wills, which were mandated under the Dodd-Frank Act passed by Congress last year to revive the country’s financial system.
Actually, a systemic resolution would make it easy for the regulator to address bank failures efficiently, maximizing the sale value of a failed bank and minimizing creditor losses. Moreover, the FDIC will carry the power to liquidate a bank if its collapse shakes the country’s financial stability.
Systemically important banks with at least $50 billion in assets will be required to file these wills to the FDIC, the Federal Reserve and the Financial Stability Oversight Council effective January 1, 2012.
The dates for filing the wills extend to July 1, 2012 for institutions with more than $250 billion in non-bank assets and July 1, 2013 for institutions with non-bank assets between $100 billion and $250 billion. And this not a one-time affair. The banks must submit revisions to their living wills every year.
Out of the total 7,513 FDIC-insuredU.S. banks and savings associations, there were 36 institutions with total assets of $50 billion or more as of June 30, 2011, according to the data provided by SNL Financial. These institutions would be covered under the FDIC’s living wills rule. Also, there are more than 98 U.S. subsidiaries of foreign banks under the FDIC coverage.
Along with filing the living wills, the FDIC-insured banks with more than $50 billion in assets will also have to file a separate plan that is yet to be finalized.
Goldman Sachs Group Inc. (GS), Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C) are among the big names that are required to provide a road map for liquidating themselves if they collapse.
We don’t have to stretch our memories far realize the importance of a living will for banks. Such a resolution would have come of good use back in 2008, when Lehman Brothers tanked.
In June, the Federal Reserve required 35 systemicallyimportant U.S. banks to submit their capital plans annually to prove their financial ability to confront another recession. The Federal Reserve also holds the right to ban capital deployment activities of unsuccessful banks. This is part of Federal Reserve’s effort to closely monitor capital ratios of banks and identify systemic risk in advance in order to avoid recurrence of the latest federal bailout program.
After learning a lesson from the latest recession, Americans will never wish to go back to those dreadful days only to earn higher capital rewards from their banks. Hopefully, living wills and disciplined reruns of stress tests will prevent the big banks from flirting with risky activities that jeopardize general economic health. Most importantly, these advance precautions could ultimately translate to less involvement of taxpayers’ money for bailing out troubled financial institutions.
BANK OF AMER CP (BAC): Free Stock Analysis Report
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