Five major US banks have failed to live up to regulatory requirements laid out by Congress after the 2008 financial crisis.
The regulations are meant to protect the wider economy should one or more of them fail.
After giving the banks failing grades for the strategies they would deploy if they plunged into bankruptcy, regulators on Wednesday gave the banks six months to get their disaster plans in shape.
JPMorgan Chase, Bank of America, Wells Fargo, Bank of New York Mellon and State Street Bank were cited by the Federal Reserve and the Federal Deposit Insurance Corporation for “living wills” that are “not credible” or are insufficient for an orderly restructuring if needed.
“It’s not confidence-building,” Mayra Rodriguez Valladares, a financial consultant, told Al Jazeera. “Although headquartered in the US, this would be a huge challenge for UK, Japan etc if they failed.”
The banks were required to submit the plans outlining how they would reshape themselves in the event of failure.
The financial industry is the worst performing sector of the S&P 500 this year.
Profitability at risk
The US government exercise is aimed at avoiding a repeat of the taxpayer bailouts of “too-big-to-fail” banks during the 2008 financial crisis.
Having to earmark bigger capital reserves against unforeseen losses could eventually erode the banks’ profitability.
They might try to compensate by charging consumers higher fees for services.
However, they will not face any government sanctions, such as new capital-building mandates or forced sales of assets, for at least six months.
The five banks, with a total of about $5.6 trillion in assets, were among eight Wall Street behemoths whose plans were evaluated.
The other three banks – Citigroup, Goldman Sachs and Morgan Stanley – got scarcely better grades from the regulators.
The big banks have been working on their plans for four years.
The regulators already put them on notice in mid-2014 that they had to correct serious deficiencies.
The regulators gave them an October 1 deadline to fix the problems or face the possibility of “more stringent” requirements.
That could include ordering the banks to strengthen their capital cushions against unforeseen losses.
“Some would argue that the findings of the Federal Reserve and the Federal Deposit Insurance Corporation support the argument that these banks are ‘too big to fail'”, Al Jazeera’s Kristen Saloomey, reporting from New York City, said.
“And therefore [they are] a liability to US taxpayers. The banks say they are adjusting their plans to meet requirements.”
If the regulators still were not satisfied, banks could eventually be forced to sell off assets, but not before two years.
That helps explain why Wall Street seemed unaffected by news of the regulators’ action, and stocks of major banks rose in US trading after the announcement by the agencies.
They closed moderately higher. JPMorgan Chase gained 4.5 percent to finish at $61.94. Bank of America picked up 3.7 percent to $13.76.
The big banks are in strong financial shape and are facing no threat of collapse.
They sit on strong bases of capital that the regulators ordered them to shore up in recent years.
The banking industry as a whole has recovered steadily since the financial crisis, regularly reporting profits.
At the same time, it has been a tough patch for big banks in recent months.
Profits and share prices have fallen as their loans to energy companies have soured and the Federal Reserve has indicated that it will slow the pace of interest rate increases, which hurts bank profits.