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Big banks prepare death plans

By David McMillin · Bankrate.com
Wednesday, June 27, 2012
Posted: 2 pm ET

Some of the biggest banks in the country are preparing to unveil blueprints that regulators can use in the event that one of these too-big-to-fail institutions actually meets its demise.

On Friday, JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley are among nine banks that will submit outlines for how regulators could effectively guide these institutions through bankruptcy or liquidation. The Federal Reserve and the Federal Deposit Insurance Corp. will review the plans, which are known as living wills, to determine how hazardous their current structures are to the economy and whether the proposed plans provide realistic resolutions for worst-case scenarios.

The balance sheets at big banks have become serious stressors for regulators who worry about the potential of another financial crisis. Requiring these living wills is the government's way of protecting the economy from what would be very intense aftershocks following the failure of a banking giant.

What do these wills mean for you? If the process is successful, it means your money will be safer. If you have accounts at one of these institutions, your bank may begin focusing more on traditional banking services like deposits and loans instead of riskier trading activities. By putting these banks under a microscope, this initiative is designed to limit stories such as the recent $2 billion loss at JPMorgan.

The living wills will provide some much-needed guidance for overseeing the banking industry, but they won't be simple documents for anyone involved in writing or reviewing them. David Henry and Dave Clarke at Reuters report that the plans could reach lengths of 4,000 pages. While the five biggest banks have the earliest deadlines for submission, there will eventually be 124 institutions that will be responsible for drafting these plans. That's a lot of reading material -- almost a half-million pages worth of it.

What do you think of the requirement to write living wills? Will it truly make the banking industry safer? Or are too-big-to-fail institutions simply too-big-to-understand?

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3 Comments
Sue
August 18, 2012 at 2:03 am

Don't worry, Frank. This depression will be much greater than the Great Depression. All banks will collapse. Only a rise in interest rates of 5% will do the dirty trick.

Sorry you have to see two of them in your lifetime. This one will be much worse.

T. Frank Saffold
July 08, 2012 at 8:53 pm

The last sentence in my comment should read "living will" instead of "living trust".

T. Frank Saffold
July 08, 2012 at 8:48 pm

I can distinctly remenber as a 12-year old in 1932 in the little town of Vidalia, Georgia, with banks closing around the country, hearing my neighborhood playmates say their daddies had said that if Darby Bank closed they would tar and feather Frank Darby and ride him out of town on a rail.
I rememeber wondering if they would strip him down to the skin before appling the tar, or leave him in his BVD's (men's one- piece underwear of the time.)
Choice of tar was a no-brainer. The white, gooey stuff that dribbled down the cat faces into the tar cups had to be the stickiest stuff in creation!
Chicken feathers were plentiful. (Back then you mother bought the chickens live, broke thier necks, doused them in boiling water and plucked the feathers.) You'd have to choose between white leghorns, domineckers, rhode Island reds, or game. (White leghorns would attract more attention.)
Experienced as we were in climbing rail fences, we were sure they would make Frank straddle the rail, rather than let him ride side-saddle.
Fact is, Darby Bank never closed. Still going strong as Darby Bank and Trust.
Banks in an incessant search for larger profits (and bigger bonuses) have entered into riskier and riskier ventures -- knowing the Federal State will not let them fail.
That has to change! One way would be to require ("mandate") that every so-called "living trust" include a tar/feather/rail feature.