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Documents: U.S. banks were told to make plans to prevent collapse

Five of the largest U.S. banks were directed by regulators to develop recovery plans for staving off collapse if they faced serious financial problems in the midst of the recession, Reuters reported, citing documents it obtained through a Freedom of Information Act request.

The Federal Reserve and the U.S. Office of the Comptroller of the Currency first directed the banks — Bank of America Corp., Citigroup Inc,, Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co — to come up with these recovery plans in May 2010, according to the documents Reuters obtained.   

The regulators told the banks to consider drastic efforts to prevent failure in times of distress, including selling off businesses, finding other funding sources if regular borrowing markets shut them out, and reducing risk. The plans must be feasible to execute within three to six months, and banks were to “make no assumption of extraordinary support from the public sector,” according to the documents.

The 2-year-old program is in addition to the “living wills” the banks crafted to help regulators dismantle them if they actually do fail. It shows how hard regulators are working to ensure that banks have plans for worst-case scenarios and can act rationally in times of distress.

Recovery plans differ from living wills, also known as “resolution plans,” which are required under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Living wills aim to end bailouts of too-big-to-fail banks by showing how they would liquidate themselves without imperiling the financial system.

“Recovery plans are about protecting the crown jewels,” said Paul Cantwell, a managing director at consulting firm Alvarez & Marsal. “It’s about, ‘How do I sell off non-core assets?’ The priority is to the shareholders. A resolution plan is about protecting the system, taxpayers and creditors.”

The recovery plans are being used as part of regulators’ ongoing supervisory process. In Britain, recovery and resolution plans have both been part of the living will requirements for large banks.

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