07-10-2024
The recent critique by U.S. regulators of the “living wills” submitted by major banks like JPMorgan Chase, Citigroup, Goldman Sachs and Bank of America underscores ongoing concerns about the resilience and preparedness of these financial giants in the face of potential crises. These so-called living wills, mandated by the Dodd-Frank Act after the 2008 financial crisis, are intended to ensure banks can safely unwind their portfolios without necessitating government bailouts.
The Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC) have found these banks need to improve their plans significantly. For example, regulators found Citigroup had shortcomings linked to data integrity and management issues, which were also noted in their 2021 assessment. This indicates a persistent challenge for Citi in meeting regulatory expectations, emphasizing the need for accurate projections of liquidity and capital requirements in a crisis scenario. Regulators are particularly concerned with the banks' ability to unwind their extensive derivatives portfolios, a crucial aspect given the role derivative securities played in exacerbating the 2008 crisis.
The banks have been given until September 2024 to address these deficiencies and must submit revised plans by July 2025. Citigroup has acknowledged the need to accelerate improvements in its regulatory processes and data quality, reflecting a broader issue within the financial industry regarding the pace of compliance and reform.
This situation highlights the delicate balance regulators must maintain between ensuring financial stability and allowing banks the flexibility to operate efficiently. While progress has been made since the 2008 crisis, these recent events serve as a stark reminder that vigilance and continuous improvement are essential to prevent future systemic risks. The financial system's stability hinges on the meticulous and proactive management of potential vulnerabilities, especially in institutions deemed "too big to fail.”
Cathy Zhang is an associate professor of economics at Purdue University’s Mitchell E. Daniels, Jr. School of Business. She has received Purdue’s John and Mary Willis Young Faculty Scholar Award for her research, which focuses on macroeconomics, monetary economics, international economics, and search theory.
