GAO: Regulators should make 'living will' criteria public

A government watchdog wants to see bank regulators be more transparent about how they are determining the “too big to fail” status of large institutions.

The Government Accountability Office warned Tuesday that a lack of information made public by regulators about how large financial institutions could be broken up during tough times could “undermine public and market confidence” in those plans.

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One of the significant new powers handed to regulators under the Dodd-Frank financial reform law directs them to assess “living wills” drawn up by the nation’s largest financial institutions.

Under those plans, banks would detail how they could be taken apart in an orderly manner should they face collapse, so as to ensure no broader harm to the financial system or need for a bailout.

So far, the Federal Reserve and Federal Deposit Insurance Corporation have not deemed any of those plans credible, and have are reviewing a revised set of plans submitted by the big banks.

But the GAO argued in its report that the regulators should make public their criteria for assessing the plans.

When the regulators rejected every original plan submitted by the banks, they did not publicly detail the shortcomings. Instead, they merely labeled the blueprints as “not credible,” and ordered a new set to be drawn up.

While regulators have guarded their criteria by calling it confidential, the GAO contended that making it public could make it easier for banks to meet them, and make regulators more accountable to the public.

The GAO also cautioned that it may not be feasible for basks to comply with a related requirement. Under the new rules, banks are required to annually submit plans, but GAO found it took regulators, on average, nine months to review those plans. The watchdog recommended a longer filing period to ensure banks can draw up regular plans and regulators can review them.

In response to the GAO study, the Fed and FDIC said they agreed with the recommendations, and would work towards implementing them.