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Big banks confident living wills will prevent taxpayer bailouts

Following the public release of portions of banks’ “living wills,” nine of the world’s largest banks expressed confidence on Tuesday in the ability of the plans to salvage the institutions without taxpayer bailouts.

Under the 2010 Dodd-Frank Act, banks are required to design and submit living wills, or emergency plans to be implemented in order to wind down a failing financial institution. The documents would essentially allow for the resolution of the institutions without damaging the U.S. financial system. The Federal Deposit Insurance Corp. gained the authority under Dodd-Frank to resolve failing financial institutions if the bankruptcy process would be ineffective, Business Live reports.

If the plans submitted by the banks to regulators are found to be inadequate, regulators could force the institutions to downsize or sell certain business developments.

The documents released on Tuesday include several dozen pages per bank that summarize the confidential plans submitted to regulators. Financial institutions argued in the documents that the resolution plans will prove effective with no consequence to the U.S. financial system or to American taxpayers, according to Business Live.

JPMorgan Chase & Co. said in its plan that the bank’s liquidation “would not require extraordinary government support and would not result in losses being borne by the U.S. government.”

Additionally, Bank of America Corp. said that “certain assets and liabilities would be transferred to a bridge bank that would, subject to certain assumptions, emerge from resolution as a viable going concern.”

Banks that have already submitted living wills include Deutsche Bank, Morgan Stanley, UBS, Barclays, Goldman Sachs, Credit Suisse and Citigroup. Other large banks will be required to submit plans before July and December of 2013, with a total 125 banks expected to submit living wills, Business Live reports.

The plans come almost four years after the 2008 financial crisis, in which the U.S. government sold off investment bank Bear Stearns to JPMorgan and then allowed Lehman Brothers Holdings to fail. After the start of the crisis, a $700 billion taxpayer bailout followed and the government provided guarantees to the financial system.

Though the plans are intended to assure regulators of the institutions’ viability, critics have expressed doubt in the plans’ ability to prevent damage to the financial system. Banking consultant Bert Ely is skeptical of the plans, saying that market turmoil could discourage investors from purchasing failing institutions’ assets.

“The presumption of a one-off event is not realistically valid,” Ely said, according to Business Live. “You can have one company blow itself up, but more often than not there are systemic problems.”

Regulators plan to provide feedback on the plans by September, but Jaret Seiberg, a financial policy analyst at Guggenheim Partners, said that regulators are unlikely to force the banks to institute any major changes.

“Our initial review suggests there is little real risk that regulators could reject one of these plans,’ Seiberg said, Business Live reports. “That is important because regulators could break up a financial firm that fails to submit a credible plan.”

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