Garnet Capital Advisors Blog

Archived news

October 25, 2016

Banks Adjust Business Models to Deter Costs of Regulations

The biggest banks in the US are making significant changes to their business models in order to remain in compliance with regulators' requirements to ensure sufficient capital is held to avoid a government bailout. A "living wills" requirement came about in 2010 when the Dodd-Frank law was developed following the financial crisis in an effort to avoid the need for a bailout on the taxpayer's dollar. Now, big banks in the US will need to show regulators that they've made the necessary structural changes to ensure a separate holding company can infuse their subsidiaries with enough capital to keep running, even if the parent company must file for bankruptcy.

Big banks must develop new structures to keep certain areas of business functioning, even if other units need to be shut down.

In an effort to convince regulators that they're capable of absorbing financial throes without negatively impacting the taxpayer's dollar to continue running, big banks are making adjustments to their business models.

Top banks in the US have recently submitted updated "living wills" to Federal Reserve and Federal Deposit Insurance Corp regulators in hopes of showing them how they keep key parts of the business functioning even if the parent company would have to be eradicated amidst a financial crisis.

This issue has been at the forefront of the minds of big bankers, as the inevitable ruling could be a significant game changer for Wall Street.

Regulators want to make sure that taxpayers are prevented from being the source of major bail-outs for big banks. As such, banks are now required to prove they've got the capital requirements to be able to bail themselves out instead.

Banks had previously been unsuccessful at convincing regulators that they had a sufficient living will plan to help dig them out of a financial hole should they ever find themselves in one. Rather than having to subject taxpayers to a bailout the country's leading banks are now in the position to create new structures that would keep their most critical sectors functioning.

The biggest banks in the US have been tweaking the public-related components of their living wills by implementing a holding company between the parent company and its subsidiaries. By having an intermediate company holding sufficient capital, subsidiaries of the firms can continue to remain in operation, even if the parent company goes bankrupt.

Regulators want to ensure taxpayers aren't stuck with the job of bailing big banks out in a time of crisis.

This past April, five of the country's biggest banks - Wells Fargo, J.P. Morgan, Bank of America, State Street, and Bank of New York Mellon - were informed that their living will assets did not meet regulatory standards. As of this month, they'll need to submit revisions to their plans.

J.P. Morgan submitted a "meaningfully simplified" structure in how it funds subsidiaries within the company, particularly foreign entities during times of crisis. The firm has shifted assets into its new intermediate holding company, which would be capable of supplying capital into distressed subsidiaries should the need arise.

Wells Fargo's means of improving its structure include boosting staff dedicated to planning and preparing for resolutions before financial issues even occur. A senior executive has been placed in charge of that specific office and reports directly to the CFO. Bank of America Corp. and Citigroup Inc. are using an existing subsidiary to fill the role as holding company.

The newly-structured living wills should allow the parent company to file for bankruptcy while its subsidiaries are protected and continue on with their operations.

Should their plans fall short upon resubmission, these banks could be slapped with hefty financial penalties. Without such structure changes, banks could retain less capital in subsidiaries, including those overseas, and put them in a position to be unable to support their operations and internally bail themselves out in times of financial chaos.

Facilitating Loan Sales With the Help of a Seasoned Loan Sale Advisory Team

In an environment where banks are increasingly facing heightened regulatory scrutiny to adjust their business models to remain compliant, maintaining a sound balance sheet has never been more important. Every decision to sell or acquire loan assets is a critical one, and should only be made with sound principles and advice. At Garnet Capital, we help facilitate loan sales and purchases of all sizes for financial institutions that are in need of a balance sheet adjustment.

Find out more about the valuation services from Garnet Capital and sign up for our newsletter today.