US regulators have raised concerns about the contingency plans of major banks, including JPMorgan Chase, Bank of America, and Citibank, for managing trillions of dollars in derivatives.
Inadequate ‘Living Wills’
The Federal Reserve and Federal Deposit Insurance Corporation (FDIC) have found that the banks’ “living wills” – plans for winding down their operations without government assistance – are insufficient.
Citibank’s Data Issues
Specifically, Citibank’s data management and control systems are said to be corrupting its calculations of liquidity and capital needed to close derivatives positions in the event of bankruptcy.
Lessons from the Financial Crisis
Derivatives played a major role in the 2008 financial crisis, amplifying risks and causing widespread losses. Regulators are concerned that banks’ current derivatives holdings could pose similar threats.
Regulatory Deadlines
The banks have been given until September to address the shortcomings in their contingency plans. Regulators are also asking them to ensure they can obtain necessary approvals from foreign governments to carry out their resolution plans effectively.
Dodd-Frank Act Requirements
The Dodd-Frank Act, passed after the 2008 crisis, requires large banks to file living wills. Regulators are emphasizing the importance of contingency planning to prevent future financial instability.
