Regulators Remain Unconvinced of Big Bank’s Ability to Safely Wind Down in a Financial Crisis
As part of the 2010 Dodd-Frank regulatory scheme, banks are required to submit an annual “living will” detailing, among other things, the bank’s operations and exposures, in addition to a plan of how the bank could be dismantled without relying on tax payer funded support in the event they reach a point of potential failure during a financial crisis.
After a review by the Federal Reserve (the Feds) and the Federal Deposit Insurance Corporation (FDIC) of recently submitted bankruptcy plans of eleven of the nation’s largest banking institutions, the Feds and the FDIC chastised the plans as being “unrealistic or inadequately supported” and that the plans “fail to make, or even identify the kinds of changes in firm structure and practices that would be necessary to enhance the prospect for an orderly failure.”
Regulators set a time frame for these banks to address the apparent deficiencies in their plans by July 2015 or face tougher capital requirements, growth restrictions, and even go so far as to break up the bank if they are unable to make significant progress.
In order to avoid harsher rules and possible dismantling, regulators say banks can take steps to make their bankruptcy plans by establishing a rational and less complex legal structure, essentially showing they can quickly produce reliable information about their exposures, and amending derivatives contracts to make them easier to bring through bankruptcy.
These actions by regulators gives a clear sign they believe that banks aren’t doing enough to insulate themselves and protect the tax payer in the event of a future financial crisis. With increased regulation and scrutiny looming over the banking industry, which isn’t likely to ease up any time soon, banks are feeling the pressure to restrain growth by curbing lending practices.
Some borrowers, like small business owners, may have a more difficult time obtaining the necessary financing they need to maintain and grow their business. Unfortunately, the focus on unwinding banks and compliance with regulations takes away resources that can be used to help finance small businesses. Capstone Capital Group, LLC has funding solutions that can get you the financing the big banks can’t provide.
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