In a recent disclosure, banking regulators have identified weaknesses in the resolution plans of four out of the eight largest American lenders. The Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) have deemed the "living wills" submitted by Citigroup, JPMorgan Chase, Goldman Sachs, and Bank of America in 2023 to be inadequate.

The regulators specifically highlighted concerns regarding the banks' plans to unwind their massive derivatives portfolios. Derivatives are financial contracts tied to various assets such as stocks, bonds, currencies, or interest rates. It appears that during a testing exercise, all four banks encountered difficulties in demonstrating their ability to unwind contracts using different parameters than those initially chosen by the banks.

Of the four banks, Citigroup drew the harshest criticism from the FDIC, as its plan was considered to have a more serious deficiency that would impede an orderly resolution under the U.S. bankruptcy code. This assessment was not shared by the Federal Reserve, which assigned a less serious "shortcoming" grade to Citigroup.

The living wills, which are plans for unwinding large financial institutions during times of distress or failure, were introduced as a key regulatory measure post the 2008 global financial crisis. Every two years, the largest U.S. banks are required to submit these plans to ensure their ability to dismantle themselves in the event of a catastrophe.

The shortcomings identified in the resolution plans of JPMorgan Chase, Goldman Sachs, and Bank of America were deemed to have deficiencies by both the Federal Reserve and the FDIC. All four banks have been instructed to address these weaknesses in their next round of submission, due in 2025.

In response to the regulators' findings, Citigroup issued a statement expressing its commitment to addressing the identified issues. The bank acknowledged the need to accelerate certain areas of its transformation, but emphasized its confidence in being able to resolve any future crisis without adverse systemic impacts or requiring taxpayer funds.

The weaknesses identified in the resolution plans highlight the ongoing efforts by regulators to ensure the stability and resilience of the banking sector. It serves as a reminder that comprehensive and reliable plans are necessary to navigate potential financial crises and safeguard the broader economy.

As the banks work to rectify the deficiencies in their plans, the industry will be closely watching the progress made in bolstering their unwinding capabilities.