By Ryan Tracy
WASHINGTON--U.S. regulators added three foreign-owned banks to
the list of big financial firms that haven't shown they can
collapse without causing broader economic damage.
The Federal Reserve and the Federal Deposit Insurance Corp.
found shortcomings in the "living wills," or bankruptcy plans, of
the U.S. units of BNP Paribas SA, HSBC Holdings PLC and Royal Bank
of Scotland Group PLC. The banks could face sanctions if they don't
fix the issues by the end of this year, when new drafts of the
plans are due, the regulators said.
A spokeswoman for BNP declined to comment, and representatives
of the other banks had no immediate comment.
The regulators' move echoes a similar rebuke issued to 11 of the
largest U.S. banks in August. Among the biggest firms, Wells Fargo
& Co. was the only bank that persuaded regulators it could go
through bankruptcy without serious damage to the financial system.
These 11 banks could face sanctions if they don't make significant
progress on the plans by July.
The living wills are a requirement of the 2010 Dodd-Frank
financial-overhaul law and spell out how a firm would wind down its
operations under the U.S. bankruptcy code if it got into trouble.
The plans must show the bank is able to be unwound without broad
negative repercussions. If the plans aren't credible and remain so
after repeated warnings, regulators can impose sanctions, including
forcing a firm to sell subsidiaries or break apart.
The FDIC found the three foreign-owned firms' plans were "not
credible," but the Fed stopped short of that finding, regulators
said in a statement. Both agencies must agree a bank's plan is "not
credible" before they can begin the process of considering
sanctions, which could take two years or more.
The Fed and FDIC split along similar lines when rejecting the
living wills of the 11 other large banks in August. But they also
promised to be harsher in the future if banks don't make
improvements.
Karen Shaw Petrou, managing partner of policy analysis firm
Federal Financial Analytics Inc., said Monday's decision "is going
to be a significant strategic event" for the foreign-owned firms,
which will need to "look very hard at their U.S. operations to
identify what the problems...are and whether they can be resolved
to U.S. satisfaction without damage to the franchise."
All three of the foreign-owned firms filed versions of the
living wills with regulators in 2013 and 2014. The regulators said
the 2014 plans made improvements from the 2013 versions but still
needed improvement, including "ensuring the continuity of shared
services that support critical operations and core business lines"
and demonstrating "the ability to produce reliable information in a
timely manner" across all operations. They said the firms must
amend certain financial contracts to ensure counterparties can't
terminate them upon a bankruptcy filing, a scenario that could
cause problems for a struggling firm.
Separately, the judge presiding over MetLife Inc.'s lawsuit
challenging its designation as a "systemically important financial
institution" has asked the Fed and FDIC to consider giving the
insurer an extension of about six months to file its first living
will document, according to a March 6 court filing. U.S. District
Judge Rosemary Collyer said the existing July 1 deadline "might
make it difficult for the court to rule" on various motions before
MetLife "begins to expend time and money to prepare" its
document.
According to the court filing, the Fed and FDIC are considering
the request and plan to vote on a possible extension by March
30.
Victoria McGrane contributed to this article.
Write to Ryan Tracy at ryan.tracy@wsj.com
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