-- This article was written by Ronald Orol of The Deal
Democratic Presidential candidate Hillary Clinton late Thursday said she would break up the big banks if they continued to receive failing grades from regulators in Washington over living wills they have to produce explaining how they would unwind themselves in bankruptcy without wreaking havoc.
Clinton's comments came after top federal regulators on Wednesday gave failing grades to five of the largest U.S. financial institutions for their post-crisis "living wills" designed to explain how they would unwind themselves in bankruptcy without wreaking havoc on the markets.
Specifically, the Federal Reserve and Federal Deposit Insurance Corp., in a coordinated effort, determined that the plans submitted by Bank of America (BAC), Bank of New York Mellon (BK), JPMorgan Chase PM), State Street (STT) and Wells Fargo (WFC) explaining how they would dismantle themselves without causing a financial tsunami were not "credible."
The living will process was set up by the Dodd-Frank Act, written in the wake of the 2008 financial crisis. The results marked the first time that the Fed and FDIC have both given failing grades to any U.S. bank on their living wills.
Clinton made the comment at a Democratic debate with rival candidate Sen. Bernie Sanders in response to a question about whether she would call on regulators to start the process of breaking up big banks after they failed their living wills. She said "absolutely" she would. In addition, Clinton said that "no bank is too big to fail, no executive too powerful to jail" and that Dodd-Frank sets up the approach that needs to be taken.
Clinton added that she would appoint regulators who are "tough enough" and ready enough to break up "any bank that fails the test under Dodd-Frank."
Jaret Seiberg, analyst at Guggenheim Partners in Washington, said in a note that her comments feed into his broad thesis that risk continues to grow for radical action by regulators to force the biggest banks to restructure. Seiberg said the pressure may be indirect through higher capital levels or tougher stress tests, which are designed to identify if big banks have the capital needed to withstand a future financial crisis. He added that, alternatively, the pressure could be more direct such as with divestiture orders tied to living will failures. "We expect this pressure to rise starting next year," Seiberg said.
Although the failures announced Wednesday in themselves don't immediately force banks to make fundamental changes to their operations, the regulatory action sets a deadline for them to fix problems in the wills, known as resolution plans, or face consequences that could eventually lead to required asset divestitures.
The five institutions must take action to address their deficiencies in a little over five months, by Oct. 1, or regulators will impose tougher new capital, leverage and liquidity restrictions on them. Finally, if any of the biggest banks don't address a deficiency within two years of the imposition of those new restrictions, the central bank can require them to divest assets or simplify their structure. It is likely this process, set up by Dodd-Frank, which Clinton is referring to when she talks about how the post-crisis statute sets up the approach she believes should be followed.
Sanders has taken a much tougher stand against the banks, ratcheting up the Democratic presidential debate rhetoric concerning the need for large financial institutions to be dismantled. In the debate, Sanders pushed back on the assertion that regulators and legislators should follow the process in Dodd-Frank to break up big banks. "I don't need Dodd-Frank now to tell me that we have got to break up these banks," Sanders said. "When you have six financial institutions that have assets equivalent to 58% of the GDP of this country, they were just too big, too much concentration of wealth and power," he said.
Two of the other largest eight U.S. banks also received significant criticism, though it wasn't as harsh. The FDIC said Goldman Sachs (GS) living will wasn't credible but the regulator's counterpart, the central bank, determined only that its plan exhibited weakness. Meanwhile, the Fed found that Morgan Stanley's (MS) living will wasn't credible while the FDIC only thought that institution's plan had weaknesses. Finally, Citigroup (C) fared best - -neither agency found its living will to be non-credible, though the regulators did find some "shortcomings" that need to be addressed.
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