The global banking has been under so much strain since 2007 that the US government has forced them to take steps to prepare themselves for a scenario that could bring down the entire banking system. As reported by Reuters, government regulators have been working behind the scenes for several years with the top five banks in the country to ensure that they can absorb a massive hit to the financial system:
U.S. regulators directed five of the country’s biggest banks, including Bank of America Corp. and Goldman Sachs Group Inc., to develop plans for staving off collapse if they faced serious problems, emphasizing that the banks could not count on government help.
The two-year-old program, which has been largely secret until now, is in addition to the “living wills” the banks crafted to help regulators dismantle them if they actually do fail.
According to documents obtained by Reuters, the Federal Reserve and the U.S. Office of the Comptroller of the Currency first directed five banks — which also include Citigroup Inc., Morgan Stanley and JPMorgan Chase & Co. — to come up with these “recovery plans” in May 2010.
They told banks to consider drastic efforts to prevent failure in times of distress, including selling off businesses, finding other funding sources if regular borrowing markets shut them out, and reducing risk. The plans must be feasible to execute within three to six months, and banks were to “make no assumption of extraordinary support from the public sector,” according to the documents.
“Recovery plans are about protecting the crown jewels,” said Paul Cantwell, a managing director at consulting firm Alvarez & Marsal. “It’s about, How do I sell off non-core assets?” The priority is to the shareholders. A resolution plan is about protecting the system, taxpayers and creditors.”
“Recovery plans required of the largest banks are helpful in ensuring banks and regulators are prepared to manage periods of severe financial distress or instability affecting the banking sector,” he said.
The recovery plans requested in 2010, meanwhile, have received little publicity. The names of the banks required to submit them have not been previously disclosed, and Reuters obtained them only through a Freedom of Information Act request.
It seems that the much talked about stress tests of 2009 proved one critical point that Americans were not made privy to: that the banking system, contrary to popular belief, is wholly unstable and would likely not be able to withstand a serious financial shock.
The plan, it seems, is that if banks get into serious trouble they would quickly sell of their assets to raise capital. Well, either that or they would simply utilize the assets of account holders per new Federal Reserve regulations that allow private money market funds (to the tune of $2.7 trillion dollars nationwide) to be frozen in an effort to keep the system afloat.
As is generally the case, the real collapse prevention plan calls for letting the little guy be financially destroyed while the banking giants walk away with record profits.
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