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Banks’ ‘living wills’ aim to prevent more bailouts

JPMorgan Chase & Co. said it would shrink by about one-third, without systemic disruption, if the company was forced into bankruptcy.Mike Segar/Reuters

WASHINGTON — Big US banks would chop off Wall Street arms and nonessential units if the companies were to fail, with JPMorgan Chase & Co. slashing its broker-dealer operations by as much as two-thirds.

Twelve banks granted the public a clearer look of their so-called living wills Monday after regulators demanded they present more convincing plans for dismantling themselves in the event of failure. While the excerpts give a better sense of what would happen in a crisis, the companies won’t learn for months whether the proposals satisfy the authorities and ease the pressure to divest businesses.

Last year, the Federal Deposit Insurance Corp. and Federal Reserve told the banks to improve their blueprints after saying lenders had failed to write outlines that could take them through bankruptcies without hurting the broader financial system.

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JPMorgan, Morgan Stanley, Bank of America Corp., and Credit Suisse Group AG were among those ordered to amend their plans, which are required under the Dodd-Frank Act.

“It’s not over yet,” said Robert Burns, a former FDIC official who now advises banks on regulatory matters for Deloitte LLP. “We don’t know whether the details they actually provide to the agencies are satisfactory.”

Excerpts released Monday show the strategy at most of the big banks is to keep subsidiaries operating while the parent companies go to US Bankruptcy Court and then sell some units. Many would cling to their core banks while shedding Wall Street operations that trade securities and make markets for clients.

JPMorgan’s hypothetical death would shrink it by about a third. Andrew Gray, a JPMorgan spokesman, said the bank’s living will would resolve the firm quickly and without systemic disruption or taxpayer support.

Citigroup Inc. would shrink corporate banking to about $300 billion in assets, cut US retail banking to about $200 billion, and sell off broker-dealers, according to its plan. Bank of America estimated it would come out of a bankruptcy with $1.2 trillion in assets, down from $2.1 trillion, having shed most of its nonbank operations.

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Big US banks have said they’re smoothing the way for orderly resolution by reorganizing relations between core units that together encompass most of their business. Still, they haven’t made much progress paring their total number of subsidiaries — a sign they’d still be difficult to resolve in a crisis. Regulatory filings for the nation’s top six banks show little or no change in their number of units, which range from 1,300 to 3,400.

In August, the agencies responsible for reviewing the documents found a long list of faults and said the next round had to make “significant progress to address all the shortcomings.” One part of the agencies’ demands for improvement: The previously anemic public parts of the massive documents needed to share more information.

Many of the plans’ public sections are twice as long as in past versions. Each bank revealed more of its internal structure and what parts of the corpse it would sell off to put back together a smaller, viable company — without government funding.

The banks said they’ve made progress in preventing their collateral from being pulled. The firms also said they’ve stockpiled long-term debt in their holding companies and made themselves less complex.

“The firms have taken meaningful, concrete steps to ensure their plans are credible and that no firm is too big to fail,” said Rob Nichols, chief executive of the Financial Services Forum, which lobbies on behalf of large financial institutions.

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“In the event that Citi needs to be resolved, our resolution plan demonstrates that we can do so without the use of taxpayer funds and without adverse systemic impact,” said Mark Costiglio, a Citigroup spokesman.

Other banks whose plans were posted Monday were Goldman Sachs Group, Wells Fargo & Co., State Street Corp., Bank of New York Mellon Corp., UBS Group AG, Deutsche Bank AG, and Barclays PLC. The regulators aren’t expected to make any judgments about the documents for several months. If the FDIC and Fed find the plans “not credible,” it begins a yearslong process that could lead to forced restructuring and divestitures at the companies.