No inheritance

Banks can't rely on lifeboats when Titanic sinks

When the good ship HMS Finance is sinking, big US banks won't be able to rely on their internal lifeboats. That's the takeaway from Wednesday's results of the so-called living wills showing how major financial institutions would be wound down in a crisis. J P Morgan Chase and Bank of America are two of five firms that failed the test, according to the Federal Reserve and the Federal Deposit Insurance Corporation. That's because they count on liquidity help from other subsidiaries that could be cut off from providing that aid when things go awry.

Liquidity has been improved at the top US banks, but it was still the key challenge for living wills. Regulators have demanded bigger cushions since the 2008 downturn. But the escape plans for J P Morgan, BofA and Wells Fargo, which also failed, were found to have deficiencies in ensuring they had enough cash on hand when a crisis hits. Officials ordered them to show the standalone liquidity of each of their subsidiaries. They also found that the liquid assets of Wells Fargo that would be transferred to the FDIC, as its receiver, wouldn't support the bank in a failed state.

Part of the problem is banks relied on getting liquidity from other pockets of their far-flung empires. J P Morgan and Morgan Stanley, whose living will was found not credible by only the Fed, are among the firms that count on help from foreign units. It's a problem because overseas governments could ring-fence the banks in their jurisdictions in a pinch. The banks were ordered to ensure they had enough liquidity without relying on that assistance.

The standalone resilience is part of a broader message from regulators. The Fed has already made clear that it doesn't want foreign banks to rely on its discount window lending, as they did in the last crisis. It's why officials have required the largest overseas firms to restructure themselves to hold more capital and liquidity at home. The living will results show that American firms also shouldn't rely on help from foreign governments.

That means the best laid plans for international cooperation could be thrown out when the next downturn hits. Regulators across the world have worked to avoid a repeat of the global chaos that erupted with the Lehman Brothers collapse. But US officials' message to their counterparts and to Wall Street is clear: every man for himself will prevail in the next crisis.