When President Barack Obama said in his State of the Union speech Tuesday that big banks are "required to write out a living will," it was the first time that many Americans had heard of the banking rule.
Obama, who appears to be in re-election mode, vowed Tuesday never again to let Wall Street "play by its own set of rules."
The Federal Deposit Insurance Corp. first proposed that big banks show how they would wind down operations if they failed in 2010. Last week, the FDIC approved the final "living will'' rule requiring banks with at least $50 billion in assets to periodically submit plans outlining, in case they collapsed, how depositors would receive their funds promptly, how the institution could be broken up and how creditors' losses would be minimized.
"Since the recent financial crisis began in late 2008, financial authorities throughout the world have recognized that planning for the resolution of large, complex financial institutions is critical to minimizing the disruption that a failure of such an institution may have," the FDIC said.
Only 36 institutions, including Chicago-based Northern Trust Corp. and Riverwoods-based Discover Financial, are covered by the rule. They hold 61 percent of the industry's $4.14 trillion in insured deposits.
The nation's biggest banks must begin submitting their plans in July; others have until 2013.
Separately in his speech, Obama said he will ask U.S. Attorney General Eric Holder to create a special unit of federal prosecutors and state attorneys general to expand investigations into "the abusive lending and packaging of risky mortgages that led to the housing crisis."
Obama added that he will send Congress a plan "that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates."
"A small fee on the largest financial institutions will ensure that it won't add to the deficit, and will give banks that were rescued by taxpayers a chance to repay a deficit of trust," Obama said in his address.
Obama's jabs at the banking industry come a month after the Treasury Department announced a profit for taxpayers of $13 billion on the recovery of more than $258 billion from bank bailout programs, consisting mostly of the Troubled Asset Relief Program, or TARP, through repayments, dividends, interest and other income.
"The president's hatred of banks continues," Richard Bove, vice president of equity research for Rochdale Securities, said Wednesday morning.
Bove said requiring banks to have living wills is overkill. The banking industry already has numerous regulators whose purpose is to take action before banks get into trouble, or, if they do stumble, to force an orderly downsizing. "They've been pretty successful at doing that," he said. "This living will stuff is pure political noise."
During the public comment period, which ended in November, leading up to the final rule, the FDIC received only seven letters about it. One letter was submitted on behalf of 10 banks including Fifth Third Bank, PNC Bank and U.S. Bank, all which will be affected by the rule. Their four-page letter, submitted in November, said they supported the goals of the FDIC's rules and appreciated the FDIC's staggered schedule in which they could submit plans.
One letter-writer suggested that developing a living will would take longer than the 7,200 hours estimated by the FDIC and would cost millions of dollars. Others raised concerns about how much of the information would be made public.
In addition to Northern Trust and Discover Financial, BMO Harris Bank, the Chicago unit of Canada's BMO Financial, would be affected. "BMO Harris Bank complies with all applicable laws and works closely with government regulators to ensure compliance," a spokesman said.
Discover referred questions to regulators and said its plan isn't due until the end of 2013.
The FDIC's final rule complements a separate rule the agency worked on with the Federal Reserve that was approved in September under the Dodd-Frank Wall Street Reform & Consumer Protection Act. That rule requires certain "systemically important" nonbank financial companies and bank holding companies to prepare resolution plans, or living wills, should they end up in bankruptcy court.