All major banks pass Fed ‘living will’ test

The Federal Reserve announced Tuesday that all eight globally important banks it oversees produced passable plans that outline how they would disassemble without shocking the economy.

Four of the eight largest banks under Fed supervision filed resolution plans or “living wills,” with no shortcomings.

The Fed said that Bank of New York Mellon, Citigroup, J.P. Morgan Chase and State Street all submitted satisfactory plans for how they would break apart their banks upon failure without triggering an economic crisis.

The Fed found shortcomings in plans produced by Bank of America, Goldman Sachs, Morgan Stanley and Wells Fargo. The banks will have to submit updated plans that address the flaws, which were not serious enough to warrant a failing grade.

The Dodd-Frank Act of 2010 requires the largest U.S. banks with international operations to submit living wills to the Fed for approval each year. That provision is intended to prevent banks from triggering financial panics upon sudden failure. It was crafted in response to the implosions of Lehman Brothers, Bear Stearns, AIG and other large firms that triggered the 2008 crisis.

The Fed praised the banks for shaping up to the strict federal standards, which officials often champion in public remarks. Even so, they said all banks should work on improving “intra-group liquidity; internal loss-absorbing capacity; derivatives; and payment, clearing, and settlement activities.”

Republicans are seeking changes to Dodd-Frank that would reduce the frequency of certain federal stress tests. A bipartisan effort that passed the Senate Banking Committee earlier this month does little to address Dodd-Frank’s rules on banks that submit living wills. But House conservatives, who have thrown cold water on the bill, could seek to add relief for large firms in talks to pass the bill.

Fed chairman nominee Jerome Powell has insisted that the bulk of Dodd-Frank should remain in place with targeted changes meant to relieve rules on the smallest firms.