Large US banks deemed unprepared for a disaster scenario – Le Figaro

US banking regulators estimate that five of the eight major institutions have misjudged the consequences of their possible bankruptcy. Banks have until October 1 to propose a new scenario that would not impose a state financial intervention.

The American banking regulators are not satisfied with the plans proposed by leading institutions of the country to liquidate their assets in the event of a major financial crisis. The Federal Reserve and the federal guarantee fund for bank deposits (FDIC) give the five banks covered until October 1 to review their copy. This is JP Morgan Chase, Bank of America, Wells Fargo, State Street and Bank of New York Mellon. A long unprecedented process is thereby initiated, after which in theory these banks could, failing agreement, be imposed even stricter standards liquidity, capital accumulation, and even some of their limitations activities.

the exercise is part of the law reforming American finance passed in 2010. the text requires, among others, banks size “systemic” to prove that if bankruptcy, liquidation does not require the provision of public funds. The explicit objective of the legislator is to prevent a large bank to be considered “too big to fail” (TBTF) and it is thus rescued by the taxpayer to avoid its dismemberment sets off a dramatic chain reaction for the entire financial world.

despite the return of US banks to profitability, the debate rages in Washington and everywhere the candidates to the white House s ‘express: Republicans and Democrats promise to put in place a system which prevents the major banks in a crisis hold the country hostage again as late 2008. the Democratic candidate, Bernie Sanders goes further than others by proposing to force major banks to split into several entities to limit their powers and their weight in the economy.

the files prepared by the major banks to their regulators than a thousand pages. They explain how their commitments could be settled, how their assets could be sold, how they could free up cash, without resorting to the guarantees of the federal state. For five banks these preparations, often referred to as “living wills”, have convinced neither the Fed nor the FDIC. However, Citigroup, has passed the examination. Moreover, the Fed was not satisfied with the Goldman Sachs plan, but the FDIC is satisfied. The opposite happened to Morgan Stanley. The retoqués institutions will have at the same time work with the same regulators on another exercise that is more familiar to them, that of the “stress tests”.

Practiced since 2009, this exercise is to submit banking assets to extreme assumptions of financial crisis, to determine whether banks have adequate models to assess their vulnerability to market fluctuations, anticipate risks and provide adequate provisions to cover potential losses. The results of these tests will be available until October. Again, the regulator could on this occasion demand better preparations and higher capital levels to preserve the individual strength of banks and that of the entire system.