Federal Regulators Identify Deficiencies in Derivatives Resolution Plans of Major Banks

Federal banking regulators have found deficiencies in the resolution plans related to the sale of derivatives for Bank of America, Goldman Sachs, and JPMorgan Chase. Additionally, the regulators differed in their assessment of an issue with Citigroup’s plan.

The Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board reviewed the resolution plans of the eight largest and most complex U.S. banks. Their reviews revealed no weaknesses in the plans submitted by Bank of New York Mellon, Morgan Stanley, State Street, and Wells Fargo. According to a joint press release issued on Friday, resolution plans "describe a bank’s strategy for orderly resolution in bankruptcy in the event of its material financial distress or failure."

Regulators have directed Bank of America, Goldman Sachs, and JPMorgan Chase to perform additional validation and testing of their plans to unwind their derivative portfolios in the event of a bank failure, ensuring these portfolios are sold in an orderly manner.

The FDIC also noted a weakness in Citigroup’s plan to unwind its derivatives portfolio. In contrast, the Federal Reserve classified the issue as a less severe shortcoming. Consequently, Citigroup must conduct further validation and testing of its resolution plan concerning the unwinding of derivatives in the event of a bank failure.

Each bank identified with deficiencies is required to submit a plan addressing these issues to the regulators by September, as outlined in their feedback letters.

The agencies stated that the banks' shortcomings "are to be addressed in the next resolution plans due by July 1, 2025," and emphasized that "each bank, in its 2025 resolution plan submission, should address the topics of contingency planning and obtaining foreign government actions necessary to execute the resolution strategy."

By fLEXI tEAM