Congressional lawmakers expressed concerns Wednesday that large banks are ill-prepared for catastrophic financial failure.
The Federal Reserve requires certain banks to submit special bankruptcy plans known as living wills. The plans must detail how the bank will resolve financial distress without costing taxpayers. The House Financial Services Committee examined whether the plans aren’t being properly vetted.
“During the crisis, fears about the systemic consequences that would result from the bankruptcies of systemically important firms motivated extraordinary government actions,” Federal Reserve Chairwoman Janet Yellen testified before the committee. “The Dodd-Frank Act requires large banking organizations to produce living wills that help these firms prepare to be resolved in an orderly way.”
The Federal Reserve created the living wills in response to the financial crisis of 2007. During the crisis, several large banks had to be bailed out by taxpayers. The Government Accountability Office found many of the wills aren’t even being reviewed by the Federal Reserve or the Federal Deposit Insurance Corporation.
“The GAO found that the Fed and the FDIC have not reviewed those submissions,” Republican Rep. Jeb Hensarling said. “I had at least one testimony that reports are tens of thousands of pages long. I heard of one that was 42 thousand pages long. Does anyone at the fed actually read these reports?”
Hensarling adds reviewing the living wills is critical since each could cost upwards of $105 million. Yellen assured the committee that the proposed wills are being reviewed and that the Fed holds regular meetings to discuss them. The Federal Reserve Board of Governors has met 12 times just to discuss the submitted wills.
“We consider eliminating too big to fail to be a key objective of Dodd-Frank so the American taxpayers won’t have to bear the burden of a large firm,” Yellen answered. “We had about 12 board meetings to consider in great detail all the key aspects of the living wills of each of these firms.”
The Federal Reserve has only rejected five proposed wills since it began the process five years prior. J.P. Morgan Chase, Wells Fargo, Bank of America, Bank of New York Mellon and State Street have until Oct. 1 to resubmit their wills. Nevertheless, some lawmakers are expressing concern with the deadline quickly approaching.
“In April of this year, you and the FDIC finally took the important step of officially declaring five living wills as non-credible,” Democratic Rep. Maxine Waters stated. “These banks are required to submit their wills in the next week. These banks have had five years to identify and address problems within their organizations.”
Waters questioned whether the Fed would be willing to use its authority if any bank fails to meet its deadline. Yellen assured the committee that the Federal Reserve is willing to leverage its authority against any bank that is not complying with the requirement by October.
“We certainly do stand ready to use our authority that we have to impose higher capital and other standards on these firms if they have not corrected the deficiencies that we have identified,” Yellen said. “We have been very specific with the five firms in indicating what the deficiencies are.”
The financial crisis caused a severe economic recession that is being felt by many almost a decade later. Some major banks at the time were deemed too big to fail and bailed out. The Federal Reserve hopes the bankruptcy plans will help to avoid the too big to fail scenario in the event of another financial crisis.
The Dodd–Frank Reform Act was created to rein in financial institutions in response to the last recession. It overhauled financial regulations in a significant way and put increased government control over the financial sector. Its supporters say the act will help avoid another huge financial collapse.