Jamie Dimon and the forthcoming zombie bank apocalypse
When the banks get into trouble expect governments to roll out “Tarp 2: The Sequel” regardless of the social and economic consequences
The post-apocalyptic fiction genre involves global catastrophic risk. Zombies, runaway climate change or alien invasion are common themes. Zombie banks are another and they could rise from an unlikely source.
Last week, five systemically important banks had their “living will” schemes failed by the US Federal Reserve and the US Federal Deposit Insurance Corporation (FDIC).
Living wills are supposed to explain to the authorities how banks would unwind and sort out their assets and liabilities in the event of a bankruptcy. The goal is to shut down without spreading panic throughout the financial system.
An unacceptable plan could result in a sanction ordering the break up of a bank. The five banks that failed both regulatory tests were Wells Fargo, JP Morgan, Bank of America, BNY Mellon and State Street.
Bondholders will be protected and equity holders wiped out. That assumption is immutable; it alone allows big banks to continue to be big and borrow so much
The two regulators disagreed on the outcome for two big US investment banks. The FDIC rejected Goldman Sachs’ plan, but accepted Morgan Stanley’s, while the Federal Reserve made opposite decisions. Eight years after the financial crisis, the results were somewhat shocking, especially considering all the effort devoted to the issue.