US regulators chide four big-bank 'living wills,' FDIC escalates Citi concerns

WASHINGTON — U.S. bank regulators ordered Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase on Friday to bolster plans for how they could be safely resolved in bankruptcy, and FDIC escalated its concerns about Citi's blueprint.

Specifically, the Federal Reserve and Federal Deposit Insurance Corporation said the banks need to refine their so-called living wills to show how they could safely unwind their derivatives portfolios when they next submit plans to regulators in 2025.

Big banks hold derivatives worth trillions of dollars in notional value and potential changes to how they manage the risk, liquidity or contingent liabilities on those portfolios could be extremely expensive.

The banks will be required to detail how they will address those shortcomings, which had not been previously flagged, in September. Bank of America did not provide immediate comment. JPMorgan and Goldman Sachs declined to comment.

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"The Fed is trying to get the banks to dial up these wills correctly," said Christopher Marinac, director of research at Janney Montgomery Scott. "It just tells us today that the Fed is not happy with the end result, and there's still work to be done."

What's happening with Citi?

The FDIC also escalated its concerns with Citi's plan to a "deficiency," meaning the regulator found it not credible, but the Fed did not follow suit. If both regulators had found Citi's plan deficient, it would have been required to resubmit an improved plan and could have potentially faced additional regulatory restrictions. Reuters previously reported the FDIC would issue the deficiency.

The split between regulators on the severity of Citi's deficiencies means the bank is on notice to make improvements, but not at risk of forced divestitures, TD Cowen analyst Jaret Seiberg said in a note.

Following the 2007-2009 financial crisis, big banks were ordered to regularly submit resolution plans to regulators, detailing how they could be safely unwound without requiring government assistance. Those plans are assessed by regulators for credibility and feasibility.

Nearly all large banks have faced some sort of critique from regulators on their living wills and been ordered to beef up their plans. For example, in 2016, regulators found road maps from Bank of America, BNY, JP Morgan Chase, State Street, and Wells Fargo deficient, and flagged shortcomings for Goldman Sachs and Morgan Stanley.

Banks typically are able to address those concerns by submitting amended documents.

In a letter to Citi, regulators said weaknesses in its data and controls contributed to inaccurate calculations of the liquidity and capital needed to unwind derivatives positions.

The problems relate to issues identified in its 2021 living will, regulators said. They also directed the bank to provide "independent confirmation" that the issues are addressed, controls are functioning and results are reliable when it submits its 2025 plan.

Regulators also required Citi to outline its resolution plans for operations outside the U.S.

Citi has spent several years working to address regulatory concerns around its data management. Reuters reported in February that the bank received fresh regulatory directives to fix problems in late 2023.

"We are fully committed to addressing the issues identified by our regulators," Citi said in a statement. "While we’ve made substantial progress on our transformation, we’ve acknowledged that we have had to accelerate our work in certain areas, including improving data quality and regulatory processes."

"We continue to have confidence that Citi could be resolved without an adverse systemic impact or the need for taxpayer funds,” Citi said.

Shares of JPMorgan, Bank of America, Goldman Sachs and Citigroup all fell about 1% in afternoon trading.

When banks next submit plans, the agencies also said they must address contingency planning and obtaining foreign government actions necessary to execute their plans, an apparent nod to struggles regulators faced safely unwinding Credit Suisse when it collapsed last year.

Instead of executing its living will, Swiss authorities engineered a takeover of Credit Suisse by UBS, raising questions over problems with such resolution plans.

Regulators did not identify problems in plans submitted by Wells Fargo & Co., Bank of New York Mellon, State Street or Morgan Stanley.

Reporting by Pete Schroeder, Saeed Azhar, Tatiana Bautzer and Lananh Nguyen; additional reporting by Sinead Carew; Editing by Chizu Nomiyama and Rod Nickel