The Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) have officially approved the resolution plans, commonly known as “living wills,” submitted by the eight largest U.S. global systemically important banks. The agencies reported no significant deficiencies in these plans during their latest review, marking a critical step in ensuring the orderly resolution of these banks should financial distress occur.
Among the major institutions, JPMorgan Chase, Bank of America, Citigroup, and Goldman Sachs have made notable improvements following a 2024 review that identified shortcomings related to their derivative portfolios. Citigroup, for example, enhanced its resolution forecasting systems by developing a new financial forecasting tool capable of generating timely entity-level financial statements and daily reporting throughout potential resolution periods. This advancement allows Citi to model various macroeconomic and firm-specific scenarios more effectively while adjusting assumptions based on stress conditions and management actions.
Bank of America has also upgraded its global wind-down tool to improve the capture of timely and accurate financial data. This tool now supports using non-business-as-usual dates for derivatives and trading positions, enhancing the bank’s ability to estimate resources needed to unwind complex derivative portfolios. Similarly, JPMorgan Chase has advanced its capabilities to adjust macroeconomic and financial market scenario inputs rapidly, improving the accuracy of its resolution forecasts.
Goldman Sachs has made strides in segmenting its derivatives portfolio by trade-level and counterparty-level characteristics. These improvements allow for greater flexibility in managing novation assumptions and enable quicker updates on derivatives wind-down strategies. The bank can now better quantify the impact of preferred and alternative exit strategies on resolution capital execution need (RCEN) and resolution liquidity execution need (RLEN).
The Federal Reserve’s semiannual Financial Stability Report, published earlier in May, complements these developments by providing an overview of vulnerabilities within the U.S. financial system. The report highlights elevated asset valuation pressures with equity price-to-earnings ratios remaining high and corporate bond spreads low compared to historical standards. Despite some volatility caused by geopolitical tensions in the Middle East, overall market liquidity has rebounded after brief deterioration.
Furthermore, the report notes a continued decline in total business and household debt relative to GDP to levels not seen since the early 2000s, although delinquencies on Federal Housing Administration loans remain above pre-pandemic levels. The banking sector remains robust with historically high regulatory capital ratios, aided by banks reducing their exposure to interest rate risks through shorter asset durations.
The Fed also pointed out that commercial real estate prices have stabilized after significant declines but cautioned about upcoming maturities on large volumes of commercial real estate debt that could lead to forced sales and downward price pressures. While some nontraded business development companies faced increased redemption requests, overall risks to financial stability from redemptions appear manageable.
In addition to these regulatory efforts, Wall Street is reportedly seeking further regulatory relief as the Fed tightens oversight of bank examiners. This dynamic reflects ongoing tensions between maintaining strict supervision and supporting financial institutions’ operational flexibility.
Together, these developments reflect a concerted effort by the Federal Reserve and FDIC to enhance the resilience and transparency of the U.S. banking system while closely monitoring emerging risks in a complex economic environment.
