Bank of America and JPMorgan Chase Clear Latest Regulatory Hurdle

By John Maxfield Markets Fool.com

Image source: iStock/Thinkstock.

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In the years since the financial crisis, banks have faced an overwhelming number of regulatory hurdles. Fortunately, Bank of America (NYSE: BAC) and JPMorgan Chase (NYSE: JPM) are getting better at clearing them as they emerge.

A bank's last will and testament

The latest instance concerned the so-called living wills mandated by the 2010 Dodd-Frank Act. These are filings that the nation's eight systemically important banks must submit to the Federal Reserve each year laying how their operations would be resolved, absent a government bailout, in the unlikely event of a bankruptcy.

These are not unlike a person's last will and testament that dispose of his or her property and possessions. But unlike the typical person, these banks are incredibly complicated organizations, with dozens of separate legal entities underneath their respective parent companies' umbrellas. Making things worse is the fact that many of these subsidiaries have interlocking operations and funding agreements.

This is where the concept of "too big to fail" comes from, as both the size and complexity of the nation's biggest banks made regulators reluctant to allow the largest among them to enter bankruptcy during the 2008 crisis. This was despite the fact that, at least in Bank of America and Citigroup's cases, they were almost certainly insolvent.

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B of A and JPMorgan get a pass

When the Fed announced in April its assessment of this year's living wills, it found that five of the banks' plans were "not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code, the statutory standard established in the Dodd-Frank Act." This included Bank of America and JPMorgan Chase, as well as Wells Fargo (NYSE: WFC), Bank of New York Mellon, and State Street.

The five banks were therefore required to resubmit new plans by October to remediate the deficiencies. If they failed to do so, the Fed threatened to subject them to "more stringent prudential requirements" -- in effect, stiffer oversight.

The good news for Bank of America and JPMorgan Chase shareholders, as well as for investors in Bank of New York Mellon and State Street, is that these four banks did indeed satisfy regulators on the second go-around. In Fed-speak, as the central bank noted in a press release Tuesday evening, they "adequately remediated deficiencies in their 2015 resolution plans." They thus needn't worry about facing added oversight.

Wells Fargowasn't so fortunate. Regulators concluded that it failed to fix two of three shortcomings that had been identified in its original submission. The net result is that Wells Fargo is, until further notice, prohibited from establishing new international bank entities or acquiring any non-bank subsidiary.

For Bank of America and JPMorgan Chase, news that they cleared the latest hurdle is unlikely to have a material impact on their share prices, which have surged over the past month. In afterhours trading following the announcement, their share prices are essentially even with their respective closing prices from the normal trading session. Wells Fargo, by contrast, is down nearly a percent since the Fed's announcement.

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John Maxfield owns shares of Bank of America and Wells Fargo. The Motley Fool owns shares of Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.