CFPB Director Questions Resolvability of Eight Largest Banks
The Consumer Financial Protection Bureau (CFPB) Director, Rohit Chopra issued a statement expressing his opinion on the resolution plans, or living wills, submitted by the eight largest domestic banks.
The statement on 2021 resolution plans highlights that banks did not submit full resolution plans instead they submitted partial plans, pursuant to a legal exemption put into place in 2019. Based on the analysis of these partial plans, the statement notes that Citigroup’s plan was not credible, particularly in light of the enforcement actions issued in October 2020 by the Federal Reserve Board of Governors and the Office of the Comptroller of the Currency. The statement also notes that these global systemically important financial institutions will submit complete plans next year in 2023, which will be more robust than the partial plans submitted in 2022. It is critical to evaluate those plans with appropriate legal standard and with sufficient rigor.
In 2021, JPMorgan Chase, Wells Fargo, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, State Street, and Bank of New York Mellon did not submit full resolution plans. Instead, they submitted partial plans, pursuant to a legal exemption put into place in 2019. These institutions are truly systemically important, with a combined USD 18 trillion in financial exposures, USD 124 trillion in client assets under custody, over 12,000 subsidiaries, and on average operate in 50 countries. Based on the analysis of these partial plans, it is clear that Citigroup’s plan is not at all credible, particularly in light of the enforcement actions two years ago by the Federal Reserve Board of Governors and the Office of the Comptroller of the Currency. The CFPB Director is in favor of issuing the feedback letters, because he agrees with certain identified areas for improvement, but does not believe that Citigroup is the only institution without a credible plan. It is highly unlikely that any of these institutions, as currently constituted, could be resolved in a rapid and orderly manner under the bankruptcy code. He raised the following issues in his statement:
- He questioned whether there are adequate safeguards to ensure the board members at these institutions will file for bankruptcy at the appropriate time.
- He does not believe these firms would be able to obtain adequate financing for an orderly court-supervised bankruptcy due to their size, complexity, and the magnitude of their short-term financing needs. Nor is it wise to alternatively assume that the unprecedented strategy of self-financing the bankruptcy would be successful.
- These firms are so large and deeply interconnected with the economy that they could inflict severe costs on businesses and households as they spiral toward failure, even before they file for bankruptcy. Regulators may ultimately step in, again, to bail them out and limit the damage.
The partial and full plans submitted this past cycle and in previous cycles will certainly be helpful if the Secretary of the Treasury opts to address a failing systemically important financial institution outside of the bankruptcy process through a resolution supervised by the FDIC. The law requires regulators to judge if the submitted resolution plans will work in a regulator-facilitated, court-supervised bankruptcy proceeding. As of now, this seems like a fairy tale. Ending “too big to fail” continues to be a goal, but it is not yet a reality. Next year, these global systemically important financial institutions will submit complete plans, which will be more robust than the partial plans submitted last year. The CFPB Director believes that it is critical to evaluate those plans using the appropriate legal standard and with sufficient rigor.
Related Link: Statement on 2021 Resolution Plans
Keywords: Americas, US, Banking, Reporting, Resolution Planning, Basel, Resolution Framework, FDIC, CFBP
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Scott Dietz
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
Previous Article
Swiss Council Adopts Ordinances on Climate Disclosures and BankingRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.