Market Overview

5 Big Banks Fail Their 'Living Will' Exams. So What?

5 Big Banks Fail Their 'Living Will' Exams. So What?

Bank investors suffered another round of negative headlines on Wednesday as the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) ruled that five out of the eight “too big to fail” U.S. financial institutions have issued “living will” breakup plans that do not pass regulatory standards.

The Fed and the FDIC jointly ruled that the plans of Bank of America Corp (NYSE: BAC), Bank of New York Mellon Corp (NYSE: BK), JPMorgan Chase & Co. (NYSE: JPM), State Street Corp (NYSE: STT) and Wells Fargo & Co (NYSE: WFC) must be amended for the banks to avoid stricter regulatory oversight.

Of the remaining three “too big to fail” institutions, Goldman Sachs Group Inc (NYSE: GS)’s plan was deemed not credible by the FDIC, Morgan Stanley (NYSE: MS)’s plan was ruled not credible by the Fed, and Citigroup Inc (NYSE: C) had the only plan approved by each agency.

But before Citigroup shareholders get too excited, the agencies noted deficiencies in all of the living wills.

“No firm shows itself capable of being resolved in an orderly fashion through bankruptcy,” FDIC Vice Chairman Thomas Hoenig said.

Related Link: The Numbers That Matter For Each Big Bank This Quarter

How much should investors worry about the results?

“We would expect the banks to remediate any potential flaws in their resolution plans in due course and although this could lead to higher regulatory-related spend, at this time we do not anticipate any meaningful increases, as the banks are already investing to comply with this and other regulatory requirements, in our view,” Keefe, Bruyette & Woods analyst Brian Kleinhanzl explains.

The market seems to have dismissed the results, as bank stocks are trading higher across the board in early Wednesday action.

Disclosure: the author is long BAC.

Latest Ratings for BAC

Jan 2021Credit SuisseMaintainsOutperform
Jan 2021Morgan StanleyMaintainsUnderweight
Jan 2021CitigroupUpgradesNeutralBuy

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