Five Big Banks Flunk Key Test, Proving They're Still "Too Big To Fail"

Federal regulators Wednesday confirmed what watchdogs have been warning for years--the biggest banks in the United States are still "too big to fail."

The Federal Reserve and the Federal Deposit Insurance Corporation (FDIC)found that five major U.S. banks failed to offer credible strategies for how they would enter bankruptcy in an "orderly fashion," without taking the whole economy down with them. The so-called "living wills" rejected by the banking agencies were submitted by Bank of America Corp., Bank of New York Mellon Corp., JPMorgan Chase & Co., State Street Corp., and Wells Fargo.

"The goal to end too big to fail and protect the American taxpayer by ending bailouts remains just that: only a goal," Thomas Hoenig, vice chairman of the FDIC, said (pdf) in a statement.

As Bloomberg explains:

The living-wills exercise was a key check on the biggest banks written into Dodd-Frank, the regulatory overhaul prompted by the 2008 financial crisis. Lehman Brothers Holdings Inc. demonstrated what could happen when huge, complex financial firms land in bankruptcy court, so this process was designed to make sure big banks in the U.S. are able to be wound down quickly without taking others with them.

The banks have until October 1 to resubmit their plans with serious "deficiencies" corrected, or face "more stringent" regulations, the agencies said.

Bloomberg writes: "The worst-case scenario for a bank that continually fails to make its case over the course of years is that regulators could eventually get authority to break them up, according to the law."

The New York Timesnotes that "[o]ther banks fared better," with Citigroup mostly satisfying both regulators and Goldman Sachs and Morgan Stanley splitting the agencies. They, too, will have to submit revised plans, but not until July 2017.

Financial reform group Better Markets said the negative assessments represented a "major development" in terms of "protecting U.S. taxpayers" and praised the Federal Reserve and FDIC for "having the courage to do what is right & honestly grade & flunk Wall Street's biggest [too-big-to-fail] banks."

Earlier this year, former Goldman Sachs executive and current president of the Minneapolis Federal Reserve, Neel Kashkari--who is credited as an architect of the 2008 bailout--channeled Sens. Bernie Sanders and Elizabeth Warren when he said the country's largest financial institutions are "still too big to fail and continue to pose a significant, ongoing risk to our economy."

Breaking up big banks has become a rallying cry of Sanders' presidential campaign.

"If a bank is too big to fail, it is too big to exist," he declared in downtown Manhattan in January. "When it comes to Wall Street reform, that must be our bottom line."

Last week, as Common Dreams reported, Sanders rolled out his plan to tackle the problem, saying that "Within the first 100 days of his administration, [he] will require the secretary of the Treasury Department to establish a 'Too-Big-to Fail' list of commercial banks, shadow banks and insurance companies whose failure would pose a catastrophic risk to the United States economy without a taxpayer bailout."

And on Wednesday, Sanders pointed out on Twitter:

The remedy, Robert Reich wrote on Tuesday, isn't more regulation. "The bottom line: Regulation won't end the Street's abuses," Reich argued. "The Street has too much firepower. And because it continues to be a major source of campaign funding, no set of regulations will be tough enough."

"So," he concluded, "the biggest banks must be busted up."