US banks told to develop 'recovery plans'

http://www.businesstimes.com.sg/archive/saturday/print/178253

PUBL I SHED AUG UST 11 , 2 0 1 2

US banks told to develop 'recovery plans'

Documents show how lenders were directed to craft proposals for staving off collapse

[WASHINGTON] US REGULATORS have directed five of the country's biggest banks, including Bank of America Corp (BOA) and Goldman Sachs Group Inc, to develop plans for staving off collapse if they faced serious problems, emphasising that the banks could not count on government help. The two-year-old programme, which has been largely secret until now, is in addition to the "living wills" the banks crafted to help regulators dismantle them if they actually do fail. It shows how hard regulators are working to ensure that banks have plans for worst-case scenarios and can act rationally in times of distress. Officials like Lehman Brothers former chief executive Dick Fuld have been criticised for having been too hesitant to take bold steps to

ADDRESSING STRESS The details of the 2-year-old programme show how hard regulators are working to ensure that top banks have plans for worst-case scenarios - PHOTO: AFP

solve their banks' problems during the financial crisis. According to documents obtained by Reuters, the Federal Reserve and the US Office of the Comptroller of the Currency (OCC) first directed five banks - which also include Citigroup Inc, Morgan Stanley and JPMorgan Chase & Co - to come up with these "recovery plans" in May 2010. They told banks to consider drastic efforts to prevent failure in times of distress, including selling off businesses, finding other funding sources if regular borrowing markets shut them out, and reducing risk. The plans must be feasible to execute within three to six months, and banks were to "make no assumption of extraordinary support from the public sector", according to the documents. Recovery plans differ from living wills, also known as "resolution plans", which are required under the 2010 Dodd-Frank financial reform law. Living wills aim to end bailouts of too-big-to-fail banks by showing how they would liquidate themselves without imperilling the financial system. "Recovery plans are about protecting the crown jewels," said Paul Cantwell, a managing director at consulting firm Alvarez & Marsal. "It's about, 'How do I sell off non-core assets?' The priority is to the shareholders. A resolution plan is about protecting the system, taxpayers and creditors."

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US banks told to develop 'recovery plans'

http://www.businesstimes.com.sg/archive/saturday/print/178253

The recovery plans are being used as part of regulators'ongoing supervisory process. In Britain, recovery and resolution plans have both been part of the living will requirements for large banks. Mike Brosnan, senior deputy comptroller for large banks at the OCC, said the regulator continuously evaluates contingency planning at the banks and savings associations it supervises. "Recovery plans required of the largest banks are helpful in ensuring banks and regulators are prepared to manage periods of severe financial distress or instability affecting the banking sector," he said. This summer, nine global banks submitted living wills to the Fed and Federal Deposit Insurance Corp, and regulators released the public portion of the documents. The recovery plans requested in 2010, meanwhile, have received little publicity. The names of the banks required to submit them have not been previously disclosed, and Reuters obtained them only through a Freedom of Information Act request. Five years after the financial crisis, concerns remain about whether blow-ups at big banks could lead to another round of taxpayer bailouts. Trading losses have cost JPMorgan nearly US$6 billion so far, and scandals such as the alleged rigging of an international interest rate benchmark have only highlighted the risks lurking inside big banks. These disasters have damaged banks' reputations, but not their balance sheets. Most are still profitable, and in recent years the five banks have improved their capital bases and liquidity. They also have been subjected to annual Federal Reserve stress tests that measure whether the banks have sufficient capital to weather severe economic scenarios. BOA and Citigroup, in a sense, have already been executing the kind of moves called for in the recovery plans. Both have been selling off non-core operations and assets to streamline their sprawling businesses, after receiving multiple bailouts during the financial crisis. BOA in June 2011 told Fed officials that it could shed branches in some parts of the country if it needed to raise capital in an emergency, a person familiar with the matter said in January. The proposal was part of a series of options provided to the Fed, including issuing a tracking stock for BOA's Merrill Lynch operations. But just because the bank proposed selling branches does not mean it's a desirable move or highly probable, the person added. In the past year, BOA has shown progress in building capital without such actions. Its Tier 1 common capital ratio increased to 11.24 per cent of risk-weighted assets as of June 30 from 8.23 per cent a year earlier. Tier 1 refers to a bank's core capital and has been the main focus of regulators in assessing a bank's capital adequacy. The banks' chief risk officers, and in the case of Citigroup, chief executive Vikram Pandit, received letters in May 2010 instructing them on what to include in the recovery plans. The requests stemmed from January 2010 crisis management meetings held by regulators. The letters sent to the five banks were nearly identical. Each plan was to address severe financial stress at the firm, as well as "general financial instability". The plans should be capable of being executed ideally within three months, but no longer than six months, the documents said. The plans should "make appropriate assumptions as to the valuations of assets and off-balance sheet positions", the documents noted. - Reuters

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US banks told to develop 'recovery plans'

http://www.businesstimes.com.sg/archive/saturday/print/178253

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