Federal Reserve criticizes ‘living wills’ of Bank of America, Citi, Goldman and JPMorgan

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U.S. regulators found weaknesses in plans put forward by Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase for how they would address their own failures.

The Federal Reserve and the Federal Deposit Insurance Corporation said Friday that among the eight largest US creditors, they detected deficiencies in the “living wills” of these four creditors. The FDIC had already voted on Thursday to deem Citi’s living will “deficient” in at least one area.

All four banks had weaknesses related to their portfolios of derivative contracts, which they and their clients use to hedge and trade risks.

The Fed and FDIC found minor problems with JPMorgan and Bank of America, saying the two banks’ systems for resolving certain derivatives trades were not fully tested. O regulators criticized Goldman for its lack of “commercial-level” information about its derivatives transactions, ordering it to present a plan to resolve the issue by early September.

Citi’s rebuke was the harshest, with the FDIC saying the bank’s resolution plan was not credible or would not facilitate an orderly resolution under the US bankruptcy code.

In addition to the issue with its derivatives portfolio, regulators said Citi had failed to resolve issues it had previously been cited for relating to its “resolving data integrity and data management issues.”

However, although the FDIC viewed Citi’s data management weakness as a “deficiency” that undermined the viability of its resolution plan, the Fed classified Citi’s data problems as a less serious “deficiency” that raised viability questions but did not entirely undermine its resolution strategy. That assessment echoed one the Fed had made in the past.

Given that regulators are divided on the severity of Citi’s problem, it is not likely that the bank will face sanctions at this time. But, like Goldman, it was ordered to submit a plan to resolve the problems identified by regulators by September 1.

Citi was fined $400 million three years ago by the Office of the Comptroller of the Currency for problems related to the way it collects and records data. The bank has not yet resolved this consent order.

In a statement, Citi said it was “fully committed” to responding to regulators’ concerns. “More broadly, we continue to have confidence that Citi can be resolved without adverse systemic impact or the need for taxpayer funds,” he said.

Jane Fraser, chief executive of Citi, highlighted regulatory compliance in an investor presentation on Tuesday as an area where it has been “very slow” to advance under her leadership.

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Living wills were introduced after the 2008 financial crisis to avoid the risk of a major creditor going bankrupt, bringing down the entire system in the future. Banks must submit their plans for approval every two years.

It is not uncommon for regulators to flag deficiencies in plans with few penalties. In 2016, Citi was the only one of the eight largest banks whose living will was not violated by the Fed, the FDIC, or both regulators. Regulators again flagged problems at several banks in 2020 without formally rejecting any of the living wills.

On Friday, regulators said lenders where they found weaknesses had until July 1 next year to address the deficiencies. Bank of America, Goldman Sachs and JPMorgan Chase declined to comment.

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