Large US banks must show how they would wind down

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The largest U.S. banks will be required to show regulators how they would break up and sell off their assets if they are in danger of failing.

The Federal Deposit Insurance Corp. voted 3-0 Tuesday to approve the rules, which were mandated under the financial overhaul passed by Congress last year. They are designed to reduce the chances of another government bailout of Wall Street banks in the event of another financial crisis.

The rules require banks with $50 billion or more in assets to submit so-called living wills to the FDIC, the Federal Reserve and the Financial Stability Oversight Council and send revised plans annually.

Among the banks affected are Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co.

The biggest banks of the group would have to start filing their plans next July. The others wouldn’t be due until 2013.

The FDIC says that 124 financial firms plus 37 federally insured banks and thrifts will be subject to the requirements. Twenty-six of the institutions are U.S. banks or financial firms. The rest are U.S. subsidiaries of banks based in foreign countries.

Regulators would have the power to seize and dismantle those banks that threaten the broader financial system. They also have the power to designate other firms as potentially threatening the financial system and require them to submit plans.

The plans must include detailed information on a bank’s businesses and operations, structure, assets and liabilities, capital cushion held against risk, and how much they owe other big financial institutions.

If their operations change, the banks would have to submit revised plans within 45 days.

Based on their review of the plans, the regulators are empowered to order banks to make changes to their operations, such as selling assets or divisions. They also can reject the plans and order banks back to the drawing board.

One Response to Large US banks must show how they would wind down

  1. File this under why-wasn’t-this-done-before. Hasn’t it always been a prudent business practice to have an exit strategy?

    Falconlady
    September 13, 2011 at 1:48 pm