JPMorgan Chase, Bank of America and Citibank Flagged for Holding Trillions of Dollars in Derivatives Without Proper Contingency Plans: Report

US regulators are flagging JPMorgan Chase, Bank of America, Citibank and Goldman Sachs over the banks’ contingency plans for trillions of dollars in derivatives.

The Federal Reserve and Federal Deposit Insurance Corporation (FDIC) say the lenders’ so-called “living wills” – which in part detail how banks could safely unwind their derivatives portfolios without requiring government assistance – are inadequate, reports Reuters.

For Citigroup specifically, the regulators say shortcomings in the bank’s data management and control systems are corrupting the bank’s calculations on how much liquidity and capital it would need to close derivatives positions in the event of bankruptcy.

The use of derivatives played a central role in the 2008 financial crisis, significantly amplifying systemic risks and triggering widespread losses and instability when the underlying mortgage assets defaulted.

Per Reuters,

“Big banks hold derivatives worth trillions of dollars in notional value and potential changes to how they manage the risk, liquidity or contingent liabilities on those portfolios could be extremely expensive.”

The agency says the banking giants need to “address contingency planning” including how to ensure the lenders can obtain necessary approvals or actions from foreign governments to carry out their resolution plans effectively.

Big banks are required to file living wills due to the Dodd-Frank Act, which passed in the aftermath of 2008.

US regulators are giving the big banks until September to address their shortcomings.

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