The US regulatory agency recently conducted a review on major banks such as JPMorgan Chase, Bank of America, Citigroup, and Goldman Sachs to determine if they are willing to independently manage a large portfolio of derivative investments without relying on government assistance.
According to reports, the “willingness” of these banks describes their strategies for safely liquidating complex financial instruments during a crisis. However, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) believe that the “willingness” of these banks is insufficient.
In particular, Citigroup has been criticized for weaknesses in its data management and control systems, which hinder its ability to accurately assess the liquidity and capital requirements needed to manage derivative positions in the event of bankruptcy.
Derivative products played a critical role in the 2008 financial crisis, exacerbating systemic risks and leading to widespread economic instability when underlying assets such as mortgages defaulted.
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According to Reuters, the large scale of derivative products held by major banks highlights significant financial risks associated with them, and potential changes in risk management strategies pose a huge financial burden.
Regulatory agencies emphasize that these financial giants need to strengthen their contingency plans to ensure they can obtain the necessary approvals and take action from international authorities to effectively implement restructuring plans.
