Federal regulators on Wednesday rejected the dismantlement plans from five major domestic banks, saying they either wouldn't work or could plunge the economy into crisis.
The Federal Reserve Board and Federal Deposit Insurance Commission (FDIC) said that Bank of America, Bank of New York Mellon, JP Morgan Chase, State Street and Wells Fargo all lacked resolution plans, often called "living wills," that met federal standards.
Living wills are plans developed by major banks to outline how they could be dismantled in an orderly way to prevent an industry meltdown or bailout.
The Fed and FDIC said those banks' plans 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." The decisions were unanimous among the Fed and FDIC boards.
The FDIC also independently disapproved Goldman Sachs's resolution plan, while the Fed also disapproved Morgan Stanley's. Citigroup's resolution plan won both agencies' approval, though the FDIC and Fed identified shortcomings the firm was asked to fix.
Each institution has until October 1 to incorporate specific feedback into their plans or will face stricter standards from the agencies.
Industry officials stressed patience after the announcement and highlighted progress banks have made.
“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.”
Former Assistant Treasury Secretary Tony Fratto said large banks were making “meaningful progress.”
The announcement “doesn't change the fact that they have made radical transformations in safety and soundness over the last seven years and are better prepared than ever to weather an economic shock,” said Fratto, now a partner at Hamilton Place Strategies.
Updated at 11:45 a.m. for clarity