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    CFPB Director Questions Resolvability of Eight Largest Banks

    November 22, 2022

    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

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