The Global Financial Crisis can be blamed for adding the phrase “too big to fail” to the public lexicon. It described financial institutions that were sufficiently important (in terms of fiscal size and connections) that were they to become bankrupt, the repercussions of their failure could cause irreparable harm to the wider economic infrastructure of the financial community, risking a chain of catastrophic failures and loss of confidence which the system would struggle to recover from. In order to prevent this financial Armageddon, public money was ploughed into such failing Goliaths in the depths of the financial maelstrom to prop them up. Needless to say, bailing out greedy bankers from the public coffers proved to be universally unpopular with the public and the stable door needed to be firmly shut.
The one notable major financial institution that failed during the crisis was that of Lehman Brothers which is the largest corporate bankruptcy in history. There are many analysts who still believe that allowing Lehman’s to fail exacerbated the Global Financial Crisis.
In Europe and the USA, as elsewhere, so-called stress tests were applied to banks to simulate how well they would fare in the event of a new economic crisis. Banks were required to hold more assets to ensure that they were able to cope with these scenarios.
In the latest incarnation of this financial navel gazing, five major US Banks (Bank of America, Bank of New York Mellon, JPMorgan Chase, State Street and Wells Fargo) have been told that their plans for ceasing operations in the event of a cataclysmic failure aren’t good enough and they have until 1/10/16 to revise them.
Amusingly enough, these deathbed scenarios have been dubbed “living wills” and must cover the businesses demise without the need for public money; presumably to cover the cost of the funeral.
The plans were evaluated by the Federal Deposit Insurance Corporation (FDIC) and found wanting. If the banks can’t satisfy FDIC by the autumn then more stringent requirements could be imposed on the banks. FDIC has been asked to provide more detail as to why the banks plans have been judged as inadequate.