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<\/p>\nBanks and their supervisors have a tendency to give the public brief flashes of transparency which rather leave you asking \u201cthanks for the information, but what am I meant to do with it?\u201d\u00a0 <\/p>\n
For example, late last month the Federal Reserve published selections from the resolution plans \u2014 the so-called \u201cliving wills\u201d \u2014 of a number of the banks it supervises.<\/p>\n
These are slightly frustrating documents.\u00a0Each bank has submitted a very detailed plan to its supervisors explaining its plans for an orderly wind-up in the event of a catastrophic loss. These should ideally describe how the process could be handled without a bailout, without disruption to the markets, without losses to the deposit insurance fund and without interruption of critical functions. It\u2019s obviously a very necessary thing.<\/p>\n
It\u2019s also, equally obviously, an incredibly commercially sensitive thing. So nearly all the interesting details are missing. We know, for example, that some investment banks have a \u201cstaff retention playbook\u201d describing how they plan to pay crucial employees to stay on the sinking ship long enough to execute the wind-up, but we don\u2019t know what this might involve or who\u2019s included in it. <\/p>\n
However, the plans are all similar in their basic shape. They use what\u2019s called a \u201csingle point of entry\u201d strategy, where the top level holding company passes on all its capital and liquidity to the important operating subsidiaries and then declares bankruptcy. The differences mainly reflect how many of these subsidiaries there are, and how much capital they might need. There\u2019s a lot of legal structure and operational detail, but the numbers for the assumptions of how bad a crisis might get are for the most part missing.<\/p>\n
The closest you can get to any quantitative analysis is to get a rough measure of how systemically important and complex the big US banks (and US subsidiaries of European banks) are by doing a simple page count of their filings:<\/p>\n
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Things line up more or less as you\u2019d expect, when you take into account that there\u2019s more to systemic importance than mere size \u2014 trading positions which might be subject to a margin call require a lot more planning than retail lending and deposit business, for example. The bulge bracket banks are there, so are the main foreign players, in rough proportion to their importance to US markets.<\/p>\n
But some qualitative analysis might be possible, if you stop trying to guess what the hidden numbers might say and instead start to consider how these documents were produced. <\/p>\n
Each one of them represents an attempt on the part of a management team to consider the genuine worst-case scenario \u2014 the one in which their bank isn\u2019t there any more. And thinking about nasty things like that is really psychologically difficult<\/a>. The Fed has spent the last decade rejecting plans and trying to force the banks to take the exercise seriously, because they kept on including unrealistic assumptions about being able to sell subsidiaries, trade their way out of trouble or otherwise avoid the Grim Reaper. It\u2019s genuinely not an easy task.<\/p>\n How well did they do? Well, one measure might be to ask \u2014 how long does it take them, in the document, to face up to the fact that they\u2019re talking about a scenario in which things have gone really bad and their bank is about to die? <\/p>\n There\u2019s an element of subjectivity to this; lots of the documents mention early on that the parent group would file for bankruptcy, because that\u2019s part of the definition of \u201csingle point of entry\u201d. But if you look through living wills for the first detailed description \u2014 mentioning words like \u201closses\u201d or \u201cdistress\u201d, or references to running out of liquidity \u2014 some banks seem to beat around the bush more than others:<\/p>\n Citi and Goldman Sachs admirably get to the point pretty quickly. Barclays and Deutsche are somewhat unfairly treated by this metric because they have to explain that the US resolution plan fits into a different plan for the European parent group. But some banks are noticeably reluctant to mention the unmentionable; Wells Fargo get nearly half way through before the bad stuff appears.<\/p>\n And when you look at the way in which they bring up the evil subject, some are much more frank than others. Goldman Sachs<\/a> admirably sets the standard for directness:<\/p>\n \u2014 We assume that the firm suffers an extremely large financial loss, followed by ten business days of significant outflows of liquidity.<\/p>\n \u2014 This causes our parent company and one smaller material operating entity, JANY, to enter bankruptcy proceedings. <\/p>\n Yep, that\u2019ll do it. Morgan Stanley<\/a> is much more circumlocutory, and seems very keen to emphasise that this is a hypothetical:<\/p>\n 3.1.1 Hypothetical Resolution Scenario<\/p>\n To develop its Resolution Strategy, the Firm has used a hypothetical failure scenario and associated assumptions mandated by regulatory guidance (the \u201cHypothetical Resolution Scenario\u201d). Under the Hypothetical Resolution Scenario, the Firm is required to assume that it would face a severe idiosyncratic stress event in a severely adverse economic environment, requiring resolution of the Firm. The Firm is also required to assume that it does not take any recovery actions or that any recovery actions taken would not be successful. The Plan describes how, in the Hypothetical Resolution Scenario, MS Parent could be resolved in a manner that satisfies the requirements of the 165(d) Rule.<\/p>\n The Hypothetical Resolution Scenario and the related assumptions are hypothetical and do not necessarily reflect an event or events to which the Firm is or may become subject. The objectives of the Firm\u2019s resolution planning efforts are to increase the Firm\u2019s resiliency and resolvability under a variety of scenarios. The Hypothetical Resolution Scenario includes a set of extremely severe economic assumptions, which require the Firm to absorb large losses and experience severe liquidity outflows in a severely adverse macroeconomic environment. The Resolution Strategy is not binding on a court or resolution authority. The Resolution Strategy is dynamic and would adapt to the facts and circumstances in effect during the period of Material Financial Distress.<\/p>\n Of course \u201csevere idiosyncratic stress event\u201d means the same thing that Goldman meant when it said \u201cextremely large financial loss\u201d, it\u2019s just a little bit less frightening to say. <\/p>\n Bank of America<\/a> steps up the euphemism by quite a few notches, moving to the passive voice to talk about what happens when \u201cfinancial health deteriorates because of stress\u201d:<\/p>\n Prior to the Bankruptcy Process<\/p>\n In the event the Company\u2019s financial health deteriorates because of stress, the Company will execute contingency options to restore its financial health. If the Company continues to deteriorate despite these actions, the Company would prepare for a potential bankruptcy filing while continuing to execute recovery actions. These preparations include BAC\u2019s timely contribution of most of its remaining cash and other financial assets to NB Holdings to facilitate the single point of entry resolution strategy. NB Holdings would then use its cash and other financial assets to provide sufficient capital and liquidity support to each Material Entity (except BAC) so they would be able to continue operations until completion of the resolution process or be wound down in an orderly fashion outside of resolution proceedings. In order to facilitate the provision of sufficient resources, BAC entered into a Secured Support Agreement, prefunded NB Holdings, and pre-positioned resources at NB Holdings and other Material Entities.<\/p>\n Barclays<\/a> goes for a \u201cmaterial financial distress event\u201d:<\/p>\n Material Financial Distress Event <\/p>\n Barclays\u2019 US Operations also experience a material financial distress event. In response, Barclays\u2019 US Operations request financial support from Group. As required by the Agencies, it is assumed that parental financial support is denied. The market becomes aware and Barclays\u2019 US Operations experience increased outflows. <\/p>\n JPMorgan<\/a> is less coy about the \u201cL-word\u201d (losses)\u2009.\u2009.\u2009.\u2009<\/p>\n During financial stress, our Key Operating Entities may incur losses or have their RWA increase, which could impair their capital and thus erode their creditworthiness. <\/p>\n .\u2009.\u2009.\u2009but it also exemplifies another trend in these documents \u2014 that some things are too traumatic to put into words, so they draw a diagram instead:<\/p>\n Alliteration also seems to help make things a bit more comforting; while JPMorgan has the \u201cStages of Stress\u201d, Deutsche Bank<\/a> goes along the \u201cCrisis Continuum\u201d:<\/p>\n And Citi:<\/p>\n This isn\u2019t really just a bit of fun for fans of corporate-speak.\u00a0The fact is that \u201coperating beyond the risk appetite statement\u201d, \u201cfinancial stress event\u201d, \u201csevere idiosyncratic stress\u201d and the like all mean the same thing \u2014 they mean \u201closing a lot of money and running out of cash\u201d.\u00a0The difference is only in how brave you\u2019re prepared to be in facing up to them.<\/p>\n![\"\"](\"https:\/\/www.newsbeep.com\/au\/wp-content\/uploads\/2025\/11\/https:\/\/d1e00ek4ebabms.cloudfront.net\/production\/3e281dd5-e26c-4590-ac28-e3fcb894c3fd.png\")
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