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    Leading Financial Institutions Under Examination for Insufficient Disaster Preparedness Procedures

    Last Friday, controllers of federal banking pinpointed severe flaws in the emergency blueprints of foremost U.S. financial institutions.

    The gaps in the so-called “living wills” — protocols for managing a controlled shutdown amidst crisis — were disclosed by both the Federal Reserve and the Federal Deposit Insurance Corporation regarding Citigroup, JPMorgan Chase, Goldman Sachs, and Bank of America. These establishments had submitted their 2023 strategies recently.

    Particular attention was directed towards the financial institutions’ methods for dismantling their intricate derivatives enterprises. Derivatives are sophisticated contractual financial products whose worth is derived from underlying elements like equities, debentures, foreign exchange, or interest rates.

    For instance, Citigroup did not exhibit adequate expertise during simulations demanding a downsizing of its derivative positions using different conditions than those the bank initially put forth. This test resulted in difficulties for all the financial entities not reaching the set bar.

    Regarding Citigroup, the supervisory bodies commented, “An evaluation of the firm’s potential to reduce its derivatives holdings under a variety of circumstances contrary to those delineated in their 2023 blueprint revealed significant shortcomings.”

    Mandated after the debacle of the 2008 financial downturn, living wills are essential for the dismantling of banking institutions without instigating systemic disruption. The most substantial banks in the United States are required, every two years, to present their dissolution plans, aiming for a methodical winding down in dire contexts. Entities noted for their planning inadequacies are obliged to correct their plans for the approaching reporting period in 2025.

    The FDIC marked Citigroup’s proposal as having a clarifiable “deficiency,” a clear indication that the banking corporation’s plans were not up to par to hold up under the nation’s insolvency statutes. Citigroup received the milder designation of “shortcoming,” attributed to the Federal Reserve not concurring with the FDIC’s stringent appraisal.

    Citigroup, based in New York, professed their obligation: “We are entirely dedicated to rectifying the shortfalls identified by our supervising entities,” while recognizing the hastened efforts to close the lapses. The firm also reasserted their confidence in a resolution approach that will not hinder the overall economy nor necessitate government bailouts.

    When queried by CNBC, JPMorgan, Goldman Sachs, and Bank of America opted not to respond.

    Image Source: Miha Creative / Shutterstock

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