US regulators find flaws with major banks’ bankruptcy plans; EU sanctions hit Russian LNG and financial institutions
The Federal Reserve and Federal Deposit Insurance Corporation said on Friday that they found shortcomings in the “living wills” of these banks, particularly in regard to their derivatives portfolios.
The FDIC deemed Citigroup’s plan “deficient”, while the Fed cited it for less severe “shortcomings”. Issues included unresolved data management problems and untested systems for unwinding derivatives trades.
Both regulators identified minor issues in the resolution plans of JPMorgan and Bank of America, noting their systems for unwinding derivatives trades are not fully tested. Meanwhile, Goldman Sachs was called out for lacking “trade-level” information on its derivatives transactions.
The regulators said that all four banks must address these issues by July 1 2025, with specific plans to resolve the issues due by September 1.
Living wills were introduced following the 2008 crisis to prevent systemic risks from major bank failures. These plans are submitted by major US banks to regulators for approval every other year. The FT notes that it is common for regulators to flag issues with little penalty; several US banks faced similar critiques in 2016 and 2020.
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The EU has agreed on its first set of sanctions targeting Russian liquefied natural gas shipments. These sanctions will also target financial institutions in third countries suspected of helping Moscow circumvent bans on exporting critical technologies for weapon manufacturing. This is part of the European bloc’s latest sanctions package in response to Russia’s invasion of Ukraine.
As reported by the Financial Times, these new sanctions prohibit Russian exporters from using EU ports to transfer LNG from large tankers to smaller vessels destined for third countries. However, the sanctions stop short of a complete ban on the purchase of Russian LNG by EU member states.
The EU defines a third country as: a country that is not a member of the EU, as well as a country or territory whose citizens do not enjoy the EU right to free movement.
Since Russia’s full-scale invasion of Ukraine in February 2022, EU imports of Russian LNG have increased, as member states seek alternatives to pipeline gas supplies that have been gradually cut off by Moscow.
According to the FT’s report, the EU’s reluctance to impose harsher sanctions on LNG stems from concerns among EU member states about potential gas shortages and the necessity of meeting storage targets to ensure sufficient winter supplies.
The sanctions package, which is the 14th set of measures against Moscow since the outbreak of hostilities, also includes restrictions on Russia’s so-called “shadow fleet” of oil tankers. These vessels operate without western insurance and under third-country registrations to evade western sanctions that prohibit Russia trading in crude oil above a certain price point.
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EU leaders will seek “swift and decisive” progress by the end of this year on establishing a US-style capital market to boost private investment in the bloc’s green and digital economy, as reported by Reuters report citing draft conclusions for the upcoming EU summit to be held in Brussels on June 27-28.
At a summit in April, EU leaders agreed on various reforms to rejuvenate the EU economy and compete with the US and China in the global tech race. Central to these efforts is the creation of a capital markets union, which has been delayed for nearly a decade due to member states’ reluctance to cede control over national financial regulations.
The draft conclusions reported by Reuters, which are subject to change before or during the summit, highlight the need for accelerated progress. “The European Council looks forward to swift and decisive progress by the end of the year,” the draft states.
The CMU aims to harmonise laws across the EU, such as regulations pertaining to capital gains tax and bankruptcy, to create a single capital market and encourage households to invest in securities rather than savings accounts. EU finance ministers have committed to establishing a CMU by 2029.
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Its AI & Finance: Bot Bank & Beyond report found that as many as 54 per cent of banking jobs have a high potential for automation, while an additional 12 per cent of roles could be augmented with the use of AI technology. Despite the potential job losses, the report suggests that banks may not see a decline in overall headcount, as the need for AI managers and compliance officers will grow.
Citi’s research also indicated that advancements in technology could potentially increase global banking industry profits to $2tn by 2028, a 9 per cent increase over the next five years.
