Federal bank regulators warned 11 big banks Tuesday that their plans for avoiding a financial panic are insufficient.
The Federal Reserve and Federal Deposit Insurance Corporation announced that the banks' so-called "living wills" — plans specifying in advance how they would go through a bankruptcy process without hurting the broader financial system — "are not credible."
The regulators ordered all 11 banks identified by regulators as too big to fail without destabilizing the financial system to revamp their plans "to facilitate their orderly resolution in bankruptcy," FDIC chairman Martin Gruenberg said in a statement.
The living wills were a major provision of the 2010 Dodd-Frank financial reform law, intended to prevent another situation like the 2008 failure of the investment bank Lehman Brothers, which threatened to bring down Wall Street as the banks' creditors panicked.
Banks began submitting annual versions of living wills to the Fed in 2012, but Tuesday was the first time regulators have said whether the plans were believable.
The question of whether big banks had adequately planned out bankruptcy was raised by Sen. Elizabeth Warren, D-Mass., in a congressional hearing featuring Fed chairwoman Janet Yellen in mid-July. Then, Yellen dodged the question of whether the Fed viewed the banks' plans as credible. Warren urged her to make a determination and to use the tools available to the Fed to tighten regulations on banks if their plans for an orderly failure were not believable.
On Tuesday, the Fed and FDIC said that while the banks' plans had different problems, in general they were too unrealistic and didn't involve taking the steps that would be necessary to facilitate a bankruptcy during a crisis.
The regulators demanded that banks take "immediate action to improve their resolvability" and that the next iteration of living wills submitted by the banks, due July 1, 2015, address the problems identified by regulators and demonstrate that the banks are adopting a less complex legal structure.
The Fed and FDIC, however, stopped short of using their authority under Dodd-Frank to raise capital standards for a bank, or even take steps to break it up, in the meantime.
The 11 banks receiving notice that their plans are inadequate are Bank of America, Bank of New York Mellon, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street Corp. and UBS.
Tuesday's announcement represents a tacit admission by regulators that a key provision of the Dodd-Frank law intended to prevent future bailouts is not working, at least not yet. It comes just a week after a highly-anticipated Government Accountability Office report on the status of too-big-to-fail banks reached mixed conclusions about whether markets perceive that the government would again bail out banks.