Biggest US banks would ditch securities arms in bankruptcy

[WASHINGTON] Big US banks said they would chop off Wall Street arms and non-essential 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 living wills on Monday after regulators demanded they present more convincing plans this year for dismantling themselves in the event of failure. While the excerpts give investors and traders a better sense of what will happen in a crisis, the companies won't learn for months whether the proposals are good enough to satisfy authorities and head off 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. JPMorgan, Morgan Stanley, Bank of America Corp. and Credit Suisse Group AG were among the firms ordered to amend plans, which are required under the Dodd-Frank Act.

"It's not over yet," 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 and will convince them of the firms' resolvability." Excerpts released on Monday show the strategy at most of the big banks is to keep subsidiaries operating while their parent companies go to bankruptcy court and then sell some units. Many of the firms 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, according to the publicly released pages of the firm's annual plan for a failure. 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 US$300 billion in assets, cut US retail banking to about US$200 billion and sell off broker-dealers, according to its plan. Bank of America estimated it would come out of a bankruptcy with US$1.2 trillion in assets, down from US$2.1 trillion, having shed most of its non-bank operations.

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 that 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.

For the first time, private meetings between regulators and bankers to preview plan outlines took place in recent weeks, according to two people familiar with the discussions. The gatherings were cordial, despite the rejections of living wills last year, said the people, who asked not to be identified because talks were private. When previous plans were criticized, bank representatives complained they hadn't been granted meetings or enough feedback during the process.

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, with Citigroup tripling its page count to 102. 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, president and chief executive officer of the Financial Services Forum, a Washington-based organization that lobbies on behalf of large financial institutions.

"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," Mark Costiglio, a Citigroup spokesman, said in a statement. "The preparation of the plan entailed a rigorous, enterprise-wide process involving senior management." Other banks whose plans were posted Monday were Goldman Sachs Group Inc., 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 years-long process that could lead to forced restructuring and divestitures at the companies.

The living-wills process is required of US banks with more than US$50 billion in assets and of non-bank financial firms labeled systemically important by the Financial Stability Oversight Council, such as American International Group Inc. In addition to the 11 banks that failed last year, regulators also rejected plans from HSBC Holdings Plc, BNP Paribas SA and Royal Bank of Scotland Group Plc. in March.

BLOOMBERG