US regulators have raised concerns about the contingency plans of major banks such as JPMorgan Chase, Bank of America, Citibank, and Goldman Sachs for managing trillions of dollars in derivatives.
According to reports from Reuters, the Federal Reserve and Federal Deposit Insurance Corporation (FDIC) have deemed the banks’ “living wills” inadequate. These documents outline how banks could unwind their derivatives portfolios safely without needing government assistance.
Specifically, Citigroup has been criticized for shortcomings in its data management and control systems, which are affecting the accuracy of the bank’s calculations on the liquidity and capital required to close derivatives positions in the event of bankruptcy.
Derivatives played a significant role in the 2008 financial crisis, exacerbating systemic risks and causing widespread losses and instability when underlying mortgage assets defaulted.
With trillions of dollars in notional value, changes to how banks manage risk, liquidity, and contingent liabilities on their portfolios could be costly, as noted by Reuters.
Regulators are urging the banks to improve their contingency planning, including ensuring they can obtain necessary approvals from foreign governments to execute their resolution plans effectively.
The Dodd-Frank Act, enacted after the 2008 crisis, mandates that big banks submit living wills. US regulators have set a deadline for the banks to address their deficiencies by September.
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