Jane Frazier, CEO of Citigroup, testifies at the Senate Banking, Housing and Urban Affairs Committee hearing on “Annual Oversight of the Nation’s Largest Banks” at the Hart Building on Thursday, September 22, 2022.
Tom Williams | CQ-Roll Call, Inc. | Getty Images
Banking regulators on Friday revealed that they had identified weaknesses in the turnaround plans of four of the eight largest US lenders.
The Federal Reserve and Federal Deposit Insurance Corp. have said so-called “living wills” – plans to wind down huge institutions in the event of a crisis or bankruptcy – Citigroup, JP Morgan Chase, Goldman Sachs And Bank of America filed in 2023 were found to be insufficient.
Regulators found flaws in how each bank planned to trim its huge derivatives portfolios. Derivatives are contracts on Wall Street that are linked to stocks, bonds, currencies or interest rates.
For example, when the company was asked to quickly test Citigroup’s ability to terminate its contracts using inputs different from those the bank chose, the firm failed: according to regulators. This part of the exercise seems to have trapped all the banks that were struggling with the exam.
“An assessment of the subject company’s ability to liquidate its derivatives portfolio in circumstances other than those contained in the 2023 plan revealed that the firm’s ability to be subject to significant limitations,” the regulators said. said Citigroup company.
Living wills are a key regulatory measure introduced following the 2008 global financial crisis. Every two years the largest in the USA. Banks must present their plans for robust recovery in the event of a disaster. Banks that have weaknesses must address them in the next wave of living will filings, due in 2025.
While both regulators found JPMorgan, Goldman and Bank of America’s plans to be “deficient,” the FDIC found Citigroup’s to have a more serious “deficiency,” meaning the plan did not allow for an orderly resolution in a U.S. setting. Bankruptcy Code.
Because the Fed disagreed with the FDIC in its assessment of Citigroup, the bank received a less severe “deficit” rating.
“We are fully committed to addressing the issues identified by our regulators,” New York-based Citigroup said in a statement.
“While we have made significant progress in our transformation, we recognized that we have had to accelerate our work in certain areas,” the bank said. “More broadly, we remain confident that Citi’s issue can be resolved without negative systemic impact or the need for taxpayer funds.”
JPMorgan, Goldman and Bank of America declined CNBC’s requests for comment.