4 Major banks FLAGGED by U.S. regulators over inadequate derivatives plans

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Four major U.S. banks were flagged by regulators over their derivatives plans, urging them to fine-tune their policies linked to these.

The four financial giants – Bank of America (BofA), Citigroup, Goldman Sachs and JPMorgan Chase – were told to improve their plans for managing bankruptcy, specifically focusing on the safe resolution of their derivatives portfolios. According to the U.S. Federal Reserve (USFR) and the Federal Deposit Insurance Corporation (FDIC), these banks must refine their "living wills" by 2025 to address the intricate risks, liquidity and contingent liabilities associated with their derivatives, which hold trillions of dollars in notional value.

The banks must submit detailed strategies on how they will address these shortcomings by September. BofA did not provide an immediate comment, while JPMorgan and Goldman Sachs declined to comment. (Related: Banks are hiding at least $620 billion in losses, creating a ticking time bomb of financial disaster.)

"The [USFR] is trying to get the banks to dial up these wills correctly," said Christopher Marinac, director of research at Janney Montgomery Scott. "It just tells us today that the [USFR] is not happy with the end result, and there's still work to be done."

The FDIC escalated its concerns with Citigroup's plan to a "deficiency," indicating that the regulator found it not credible. However, the Federal Reserve did not share this view. Had both regulators deemed Citi's plan deficient, the bank would have been required to resubmit an improved plan and could have faced additional regulatory restrictions.

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This split between the regulators means that while Citi must make improvements, it is not at immediate risk of forced divestitures, noted TD Cowen analyst Jaret Seiberg.

Regulators previously found deficiencies in several banks

After the 2008 financial crisis, large banks were mandated to submit resolution plans to demonstrate how they could be safely unwound without requiring government assistance. These plans, assessed for credibility and feasibility, have faced critiques from regulators, with banks often ordered to strengthen their plans.

For instance, in 2016, regulators found deficiencies in the plans of several banks, including BofA, BNY Mellon, JPMorgan Chase, State Street and Wells Fargo, while also noting shortcomings for Goldman Sachs and Morgan Stanley.

Banks typically address these concerns by submitting revised documents. In a letter to Citi, regulators highlighted that weaknesses in its data and controls led to inaccurate calculations of the liquidity and capital needed to unwind derivatives positions.

These issues were also identified in Citi's 2021 living will. Citi is now required to provide "independent confirmation" that these issues are resolved, controls are functioning and results are reliable when it submits its 2025 plan. Additionally, Citi must outline its resolution plans for operations outside the United States.

Citi has been addressing regulatory concerns about its data management for several years. Reuters reported in February that Citi received new regulatory directives to fix problems in late 2023.

"We are fully committed to addressing the issues identified by our regulators," Citi said in a statement. "While we've made substantial progress on our transformation, we’ve acknowledged that we have had to accelerate our work in certain areas, including improving data quality and regulatory processes. We continue to have confidence that Citi could be resolved without an adverse systemic impact or the need for taxpayer funds."

In their next submissions, the agencies also stated that banks must address contingency planning and securing necessary foreign government actions. This appears to be a reference to the challenges faced in unwinding Credit Suisse last year. Instead of executing its living will, Swiss authorities arranged a takeover of Credit Suisse by UBS, raising concerns about the effectiveness of such plans.

Regulators did not identify problems in the plans submitted by Wells Fargo, Bank of New York Mellon, State Street and Morgan Stanley. The USFR's and FDIC's emphasis on improving the banks' living wills reflects ongoing concerns about the stability and resolution of major financial institutions.

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