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Blow to banks' living wills over Federal Reserve's lending window

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Blow to banks' living wills over Federal Reserve's lending window

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Global banks can no longer assume continuing access to the Federal Reserve's discount lending window as an element of their living wills, people familiar with the process have warned.

US regulators set out the specific guidance in confidential letters on August 5 detailing why they recently rejected the living wills of the world's largest banks. Hundreds of banks took advantage of the discount lending window on multiple occasions during the 2008 credit crunch.

Critics say that instead of creating an environment for an orderly resolution that would avoid the kind of panic that ensued after the failure of Lehman Brothers, regulators are creating more risk by making a bank's failure theoretically inevitable. They added that the prohibition defeats the purpose of the discount window and the role of the Fed as the lender of last resort.

"How are you supposed to write these living wills if the assumptions regulators are making are false and inaccurate?" asked one UScommentator. "They are disconnected from what would happen in the real world."

But the Fed and the Federal Deposit Insurance Corporation, which are under pressure to avoid government bailouts in any future crisis, want to force the banks to come up with emergency plans that do not involve any government aid, even when it comes to the discount window, which is available only to banks that are in trouble rather than failing.

For the 2013 living wills, 11 banks ranging from Citigroup to Barclays were told they made unrealistic assumptions about how customers, counterparties and investors would behave in a crisis. In addition, they were informed that they failed to make or identify the kinds of structural changes that would be needed to ensure an orderly resolution.

The banks, however, did not receive any warning or guidance that they could no longer assume access to the discount window in the event of trouble in their 2013 plans.

Other people familiar with the process noted that the 2012 guidance said banks should not assume the US or any other government will provide "funding or capital other than in the ordinary course of business".

Agency officials have said the living wills are a learning process, and more leeway was given to banks for the 2012 process. But now regulators want banks to become more disciplined and uniform in their assumptions and justifications. Having already submitted living wills for this year before receiving the response to their 2013 plans, banks have to show improvements in their 2015 plans or risk facing financial penalties.

The Fed and the FDIC were split on their response to the living wills earlier this month. The FDIC took the more severe stance of deeming the plans "not credible", which paves the way for potentially punitive action. The Fed stopped short of that, saying instead that the banks had to immediately rectify the "shortcomings".

Both regulators must agree in order to be able to trigger various punishments such as more stringent capital or liquidity requirements, or forced divestitures.
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Last Updated on August 18, 2014

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