Bank regulators for the United States government have been working secretly for two years with the five largest U.S. banks, It has required them to draw of “last wills and testaments” in case they go under.
This is sensible. O\If one or more go bust in the next crisis, the government wants a fast transition.
Transition to what? How? If one of the biggies goes under, what can the government do to preserve the system?
Here is one media report:
The two-year-old program, which has been largely secret until now, is in addition to the “living wills” the banks crafted to help regulators dismantle them if they actually do fail. It shows how hard regulators are working to ensure that banks have plans for worst-case scenarios and can act rationally in times of distress.
Reuters has obtained documents from the Office of the Comptroller of the Currency regarding these banks. The banks involved are Bank of America, Goldman Sachs, J. P. Morgan, Citigroup, and Morgan Stanley.
The assignment was made in May 2010.
They told banks to consider drastic efforts to prevent failure in times of distress, including selling off businesses, finding other funding sources if regular borrowing markets shut them out, and reducing risk. The plans must be feasible to execute within three to six months, and banks were to “make no assumption of extraordinary support from the public sector,” according to the documents.
In the middle of a banking crisis, three to six months is forever.
When contacted, the banks refused to comment. That, I can believe.
These plans were required by the Doff-Frank law. The plans are called “living wills.”
These plans involve plans for selling off non-vital assets.
In the middle of a banking panic, who will want to buy them?
The government insists that contingency planning is constantly going on. No doubt. But what would be a plan for saving the system?
The Treasury Secretary came to Congress in October 2008. The plan was for a bailout. Today, the U.S. government needs $100 billion a month in loans to keep from shutting down. In the next banking crisis, where will the government get the money to bail out one or more faltering banks?
Reuters got the names of the banks with a Freedom of Information Act request. The Federal Reserve supplied the names, but not the plans.
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