* Plans must show how to close bank safely
* Public goal: Stop too-big-to-fail bailouts
* Possible result: Smaller banks
By David Henry and Dave Clarke
NEW YORK/WASHINGTON, June 27 Five of the biggest
banks in the United States are putting finishing touches on
plans for going out of business as part of government-mandated
contingency planning that could push them to untangle their
The plans, known as living wills, are due to regulators no
later than July 1 under provisions of the Dodd-Frank financial
reform law designed to end too-big-to-fail bailouts by the
government. The living wills could be as long as 4,000 pages.
Since the law allows regulators to go so far as to order a
bank to divest subsidiaries if it cannot plan an orderly
resolution in bankruptcy, the deadline is pushing even healthy
institutions to start a multi-year process to untangle their
complex global operations, according to industry consultants.
"The resolution process is now going to be part of the
cost-benefit analysis on where banks will do business," said Dan
Ryan, leader of the financial services regulatory practice at
PricewaterhouseCoopers in New York. "The complexity of the
organizations will shrink."
JPMorgan Chase & Co, Bank of America Corp,
Citigroup Inc, Goldman Sachs & Co and Morgan
Stanley are among those submitting the first liquidation
scenarios to regulators at the Federal Reserve and the Federal
Deposit Insurance Corp, according to people familiar with the
The five firms, which declined to discuss their plans for
this story, have some of the biggest balance sheets, trading
desks and derivatives portfolios of financial institutions in
the United States.
Great Britain and other major countries are imposing similar
requirements for "resolution" plans on their big banks, too.
The liquidation plans are coming amid renewed questions
about the safety of big banks following JPMorgan's stunning
announcement last month that a trading debacle has cost it more
than $2 billion - a sum far too small to endanger the bank, but
shocking enough to bring back memories of the financial crisis.
A NOD TO GLASS-STEAGALL
If the extensive planning and review process works as
proponents hope, big banks will become less hazardous to the
public and regulators will be more confident that they can let
wounded institutions die without wrecking the economy.
In congressional hearings earlier this month, JPMorgan CEO
Jamie Dimon said that the bank's contingency plan for going out
of business would let it fail without cost to taxpayers. Living
wills reduce the systemic risk of a big bank failing, Dimon
The living will requirement could actually yield similar
results to restoring Glass-Steagall without actual re-enactment
of the Depression-era laws separating commercial banking from
investment banking, former FDIC Chairman Sheila Bair told
Reuters TV earlier this month.
Bair said regulators may determine that for a liquidation
plan to work, a bank must separate traditional banking and
insured deposits into subsidiaries set apart from volatile
securities trading and securities underwriting.
The rules push banks to untangle their complex structures,
which can include thousands of legal entities, and which, in
Bair's opinion, have effectively blocked proposals for breaking
up the corporations.
Whether the Fed and the FDIC would actually force any banks
to sell businesses or cordon off insured deposits remains to be
seen, cautioned Richard Herring, a banking professor at the
University of Pennsylvania.
"We don't know if they will have the guts to do it, but the
tools are there," said Herring, a leading proponent of living
wills for more than a decade, who was appointed to an FDIC
advisory panel on the plans.
Herring worries, too, that the plans will be so long and
complex that they will overwhelm the staff at the agencies.
Still, that the plans are being written at all is progress,
PLAN FOR TWO WAYS TO DIE
Under the Dodd-Frank Act, banks and regulators must imagine
liquidations in two different ways. The first is through
bankruptcy courts with banks negotiating with their creditors.
This is the going-out-of-business method planned in the living
wills due July 1. The living wills must include how subsidiaries
in foreign jurisdictions will be liquidated.
The second way is through a new kind of liquidation process
in which the FDIC takes control of putting a financial giant
down. This method has more flexibility than is allowed in
bankruptcy courts, but still uses critical information collected
in the banks' living wills, such as where exactly to find
The new rules stagger deadlines for the banks to file plans,
depending on their size and complexity. Nine banks will file
first, including five based in the United States and four owned
abroad. Regulators have declined to name the nine banks included
in the first round.
Other large banks will have until July and December of next
year to hand in their plans, according to the FDIC. Eventually
about 124 banks are expected to submit plans, according to the
FDIC. There are about 7,300 banks in the United States.
Regulators and the big banks have been meeting since January
on what the plans are expected to include. Fed and FDIC
officials have said they expect the back-and-forth to continue
once the plans have been submitted.
The rules give the banks a series of chances to refine their
But if banks cannot come up with feasible liquidation plans,
regulators could order the banks to get rid of businesses.
Government intervention is a last resort, said John
Simonson, the FDIC's deputy director of Systemic Resolution
Planning and Implementation in the Office of Complex Financial
"I think a lot of progress can be made in having these firms
make themselves more resolvable before you get to that point of
actually imposing those severe remedies," Simonson said.
The regulators will want to see evidence that the banks can
safely resolve their debts and transfer vital customer services
and assets to healthy institutions.
The plans could easily be 2,000 or 4,000 pages long,
depending on the complexity of the banks, said Ryan of
PricewaterhouseCoopers. The plans include "very granular detail"
about bank operations, he noted, adding that "in many cases,
this is a large documentation exercise."
For example, the banks must spell out plans for hiring
lawyers and contacting regulators in key countries.
The rules for crafting the living wills are 74 pages long,
including an explanatory supplement. The plans could even
include drafts of press releases showing how the banks would
announce that they are going out of business, Herring said.
The plans are to include summaries for the public, but most
of the data will be kept confidential at the request of the
banks concerned about revealing trade secrets, according to the
The FDIC has not said when the summaries would be released.
The regulators estimated it will take all of the 124 banks
combined about 1.3 million hours of work to write their initial
plans, and each year afterwards, 267,544 hours to keep them up
to date. A 40-hour work week for a single employee equals 2,080
hours a year.