Can America’s Big Banks Get Less Complex?

Getting Leaner? Not by the Looks of It

The largest U.S. banks, under pressure from regulators to simplify their organizational structures, haven’t made much progress paring subsidiaries -- a sign they’d still be difficult to close down in a crisis.

The top six firms’ most recent regulatory filings, obtained through the Freedom of Information Act, show little or no change in the number of units, which range from 1,300 to 3,400.

The banks last week submitted their latest living wills -- blueprints explaining how they could be resolved during a bankruptcy -- to the Federal Reserve and Federal Deposit Insurance Corp. Regulators criticized earlier versions and demanded revisions, including establishing simpler legal structures. Authorities also expressed concern that cross-ownership and lending relationships among thousands of subsidiaries will make it harder to unwind the firms if they were to fail, such as during a financial crisis.

“It’s more about interconnectedness of the subsidiaries, which becomes very hard to untangle during resolution,” said Robert Burns, a former FDIC official who now advises banks on regulatory matters for Deloitte LLP.

JPMorgan Chase & Co., the largest U.S. bank by assets, owned or controlled about 3,400 subsidiaries in March 2014, little changed from the end of 2012, according to company FR Y-6 filings and data obtained from the Financial Stability Oversight Council. Morgan Stanley, the sixth-largest, had 2,900 units at the end of 2013, the most recent year figures are available, the same number as two years earlier.

Interconnected Subsidiaries

Bank of America Corp. had 1,736 subsidiaries at the end of last year, 86 fewer than in 2013, which was unchanged from 2012. The Charlotte, North Carolina-based bank’s filing was the only one available among the big six showing end-of-2014 figures. Wells Fargo & Co. had 1,273 subsidiaries as of December 2013, the fewest of the six banks.

Some of the banks’ Fed filings show how interconnected the subsidiaries are. Banc One Capital Holdings LLC, a wholly owned subsidiary of JPMorgan, owns BOCP Holdings Corp., which in turn owns Tax Credit Acquisitions LLC. Tax Credit is the owner of Banc One Housing Investors GTC-1A LLC, which owns a 50 percent stake in BOTCF I LLC. That company owns a 48 percent stake in ORC Tax Credit Fund 1 LP, which in turn has eight subsidiaries, including one named Faith Village LP. Faith Village is a low-income housing project in Columbus, Ohio.

Seven Layers

The subsidiary structure means there are seven legal layers between JPMorgan and Faith Village, which could make it difficult to untangle in a bankruptcy court. More than 50 courts around the world are still trying to conclude the 2008 bankruptcy of Lehman Brothers Holdings Inc., an investment bank with about 2,000 subsidiaries at the time.

Firms have said that a high number of subsidiaries doesn’t tell the whole story. The banks are reorganizing relations between core units that together encompass most of their business. In an April letter to shareholders, JPMorgan Chief Executive Officer Jamie Dimon talked about 34 units that house the bulk of the firm’s essential operations.

Each of those “has to be understood by the regulators and must have distinct intercompany agreements and a comprehensive plan in place to manage the legal entity in the event that it needs to be resolved,” Dimon said. “In addition, we are working to reduce the number of entities we have and to simplify our structure and inter-entity arrangements.”

Firms focusing on investment banking also have said their unit counts include hundreds of investments, which wouldn’t complicate resolution because they’re not really operating businesses.

‘Safer, Stronger’

“Resolution planning, which we strongly support, has helped us simplify our holding company structure and significantly reduce the number of legal entities,” said Michael DuVally, a spokesman for Goldman Sachs Group Inc.

At Citigroup, spokesman Mark Costiglio said the bank has become “simpler, smaller, safer and stronger” since the financial crisis. “In the event that Citi needs to be resolved, our resolution plan demonstrates that we can do so without the use of taxpayer funds and without adverse systemic impact.”

Spokesmen for the other banks declined to comment.

The 2010 Dodd-Frank Act gives regulators the authority to take measures against firms whose living wills they find insufficient, such as requiring more capital or demanding they divest assets. Wells Fargo was the only one of the six banks that received passing marks last year.

Overhauling Plans

JPMorgan, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley, along with six other firms, submitted resolution plans that were deemed insufficient last August. They’ve been working to improve the blueprints, according to Deloitte’s Burns. The Fed and the FDIC will release statements by the banks this week that provide a summary of the latest wills.

Daniel Tarullo, the Fed governor in charge of supervision and regulation, said last month the new blueprints needed to ensure that banks can be wound down without systemic contagion.

“We are expecting to see significant changes and plans for changes, in things like the legal structure of the firms, the intertwined sharing of services,” Tarullo said during a speech at the Council on Foreign Relations in New York.

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