Watchdogs praise Fed’s ‘living wills’ decision as Wall Street fumes

Wall Street is fuming over regulators’ rejection of the dismantlement plans from five major domestic banks, after news of the decision leaked early.

Financial sector watchdogs praised the Federal Reserve Board and Federal Deposit Insurance Commission (FDIC) announcement that five major banks lacked sufficient resolution plans, or living wills, to unravel without causing an economic meltdown.

{mosads}But some of Wall Street’s loudest critics are enraged that the banks haven’t gone far enough.

The Fed and FDIC announced Wednesday morning that plans from Bank of America, Bank of New York Mellon, JP Morgan Chase, State Street and Wells Fargo were “not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code, the statutory standard established in the Dodd-Frank Wall Street Reform and Consumer Protection Act.”

But a leak of much that information to the Wall Street Journal on Tuesday night has prompted investigations by the Fed and FDIC inspectors general.

“The fact that these results were leaked to the press the day before they were made public is very disconcerting and undermines the credibility of the living wills process,” said Sen. Bob Corker (R-Tenn.). “It is my hope that the person or persons responsible will face significant consequences.”

David Hirschmann, president and CEO of the U.S. Chamber of Commerce Center for Capital Markets Competitiveness, said the leak is “further evidence that the [living wills] system is broken.”

“If living wills are to be a productive tool for financial stability, regulators must fix this broken process and markets need to know how those systems will improve the allocation of capital,” said Hirschmann. “Regulators need to get back to basics so that businesses can access the resources needed to spur growth.”

Hirschmann also referred to a Government Accountability Office (GAO) report released Tuesday that called for more transparency of living will criteria. 

Few industry figures disputed the decisions themselves, but urged patience with large firms and praised stability improvements made since the 2008 financial crisis.

“By design, the living will process is iterative and will be ongoing, and the industry remains committed to continuing to work with regulators to ensure effective resolution and recovery planning,” said John Dearie, acting CEO of the Financial Services Forum, a nonpartisan policy group headed by industry chiefs.

“Large U.S. banking companies are stronger, more streamlined and more sound than before the 2008 crisis,” said Dearie. “This additional strength puts large institutions in an even better position.”

That’s not how financial sector critics see it.

Sen. Elizabeth Warren (D-Mass.) railed against banks for failing to meet federal standards and warned against sleeping on the problem.

“Our top regulators warned us about the danger of the biggest banks — and we would be foolish to ignore their warnings,” said Warren.

“Today’s announcement should remind us of the central role that the big banks played in the last crisis — and it is a giant, flashing sign warning us about the central role they will play in the next crisis unless both Congress and our regulators show some backbone.”

And Dennis Kelleher, CEO of Wall Street watchdog non-profit Better Markets, praised the Fed and FDIC for “rejecting the relentless lobbying of Wall Street and its lawyers.”

“It is past time for Wall Street to stop playing games and submit credible living wills proving they can be resolved in bankruptcy without any taxpayer bailouts,” said Kelleher.

On the campaign trail, Democratic presidential frontrunner Hillary Clinton said “it’s high time” for banks to fall into line and called for higher capital requirements and activity restrictions.

“A critical part of Dodd-Frank’s blueprint to rein in risk in the financial system is the living wills process, and it must be strongly enforced,” said Clinton. “And if these banks don’t fix their problems over time, then regulators need to break them apart.”