Regulators Tell Foreign Banks to Improve Living Wills

By Jeff Bater

Financial regulators gave four foreign banks another year to improve their living wills while finding the resolution plans of 16 U.S. institutions credible.

The Federal Reserve and the Federal Deposit Insurance Corporation announced their evaluations of the blueprints required by the Dodd-Frank Act. The plans map out how a bank would wind down in the event of material financial distress or failure of the company.

The regulators issued guidance to Barclays PLC, Credit Suisse, Deutsche Bank AG, and UBS AG to help them improve their living wills. The guidance for those foreign-based institutions with U.S. operations is organized around a number of key vulnerabilities, such as liquidity.

In the guidance to the four banks, the two regulators said a firm should have the liquidity capabilities necessary to execute its U.S. resolution strategy. “A firm is expected to have a comprehensive understanding of funding sources, uses, and risks at material entities and critical operations, including how funding sources may be affected under stress,” the regulators said.

Each of the four foreign firms is expected to satisfactorily address the vulnerabilities identified in the guidance in its living will due July 1, 2018.

”If the agencies jointly decide that the vulnerabilities identified in the guidance are not satisfactorily addressed, the agencies may determine jointly that the plan is not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code,” the Fed and the FDIC said.

U.S. Regional Banks

The federal agencies also evaluated the resolution plans of 16 U.S. companies, including regional banks. Those institutions included American Express Co., Ally Financial Inc., BB&T Corp., Capital One Financial Corp., Comerica Inc., Discover Financial Services, Fifth Third Bancorp, Huntington Bancshares Inc., KeyCorp, M&T Bank Corp., Northern Trust Corp., Regions Financial Corp., SunTrust Banks Inc., PNC Financial Services Group Inc., U.S. Bancorp, and Zions Bancorporation.

The Fed and the FDIC said they did not find that any of the living wills submitted by the 16 firms were not credible or would not facilitate an orderly resolution.

However, one of the 16 companies, Northern Trust, was found to have shortcomings. In an example of one gap, the regulators questioned whether the Chicago-based bank “has fully considered the potential obstacles to funding flows among its domestic and international material entities.”

The shortcomings must be satisfactorily addressed by the end of 2017. Northern Trust was not immediately available for comment.

The regional banks have fared better in the living will process than their bigger counterparts, according to Ian Katz, an analyst at Capital Alpha Partners.

“The overall thumbs-up reinforces one of our themes for financials—that the D.C. regulatory environment for regional banks is positive as the Fed in particular shows that its safety and soundness concerns are focused on the large SIFI banks,” Katz said in a note to clients.

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