The biggest banks in the U.S. were made to write living wills, so that in the event of another crisis, like the one in 2008, the economy wouldn't go down with them.
But this week, they basically flunked their checkups with federal regulators.
“Banks weren’t expecting this kind of pushback, they’ve been submitting these living wills for the last several years, like three years in a row, starting in 2012, and they kept on falling short,” says Paddy Hirsch, Marketplace editor and host of The Whiteboard. “But nobody’s really pushed back on them. This time, the regulators pushed back really hard. And it’s taken the banks a little bit by surprise.”
And if banks don’t cooperate, banks could face additional regulations.
“I think it’s in the back of everybody’s minds that [the 2008 crisis] is a possibility. And what the regulators are trying to do, is get to a place where it’s as remote a possibility as possible. And for the most part, the people who are running the banks absolutely don’t want to be in a position where they are a bank that’s ‘too big to fail.’”
So, what happens next?
“What they might actually do is start changing their legal structures to make them less complex,” Hirsch says. Financial derivatives contracts and other structures could be simplified to comply with new and additional regulations.