Living Wills Clear Fed Review as Big Banks Fix Derivatives Weaknesses

Living wills cleared an important regulatory hurdle on May 22 after the Federal Reserve and the Federal Deposit Insurance Corporation said the largest U.S. banks and dozens of foreign banking organizations submitted resolution plans without new shortcomings or deficiencies. The decision marks a notable shift from last year, when regulators said four of Wall Street’s biggest institutions had not shown convincingly enough how they would unwind complex derivatives books in a crisis.

The update matters beyond compliance. Resolution plans, often described as bank living wills, sit at the center of the post-2008 effort to make sure major financial institutions can fail without forcing taxpayers into another emergency rescue. By saying the 2025 submissions cleared review and that derivatives-related weaknesses had been satisfactorily addressed, regulators are signaling progress in one of the most technically difficult parts of big-bank supervision.

Why Living Wills Matter Again

Living wills tend to attract attention only when something goes wrong, but that is exactly why they matter. They are designed to answer a hard question in advance: if a giant cross-border bank were pushed into material financial distress or failure, could it be resolved in bankruptcy without detonating the wider financial system?

The Fed and FDIC said they jointly reviewed the July 2025 plans from the eight largest and most complex domestic banking organizations, along with 56 foreign banking organizations. In their May 22 release, the agencies said they did not identify any shortcomings or deficiencies in those submissions, offering one of the clearest recent indications that the largest institutions are improving the mechanics behind their crisis playbooks.

The New Fed and FDIC Verdict on Living Wills

The official release was brief, but the message was substantial. The two agencies said they had published feedback letters for the affected firms and found no new deficiencies in the latest plans. For the banks, that means the current review cycle ended without the kind of formal criticism that can intensify supervisory pressure and force remedial work on a compressed timeline.

Reuters reported the same day that regulators also concluded the derivatives-related weaknesses previously identified at Bank of America, Goldman Sachs, JPMorgan Chase, and Citigroup had been satisfactorily addressed. That point is crucial because derivatives portfolios can become difficult to value, transfer, hedge, or unwind quickly during periods of market stress, especially when several large counterparties are under pressure at the same time.

The agencies’ language does not mean large-bank resolution has become easy or automatic. It means the plans submitted in 2025 were good enough, under the regulators’ current framework, to avoid a new finding of weakness. That is a meaningful distinction in a regime built around continuous iteration rather than one-time certification.

What Changed Since the 2024 Review of Living Wills

The contrast with June 21, 2024 is what gives the new decision its news value. In that earlier joint review, the FDIC and the Fed said they had found weaknesses in the 2023 plans from Bank of America, Citigroup, Goldman Sachs, and JPMorgan Chase. For three of those banks, the agencies classified the issue as a shortcoming.

Citigroup’s case stood out more sharply. The FDIC said the weakness in Citi’s 2023 plan was serious enough to amount to a deficiency, while the Federal Reserve judged it a shortcoming. Under the agencies’ rule, the lower of the two joint classifications controlled, so the plan was ultimately treated as having a shortcoming. Even so, the split highlighted how sensitive and consequential the derivatives question had become.

The May 22, 2026 release suggests the banks used the intervening period to strengthen the operational detail behind those plans. Regulators did not spell out every adjustment in the press release itself, but their conclusion that each derivatives-related weakness had been satisfactorily addressed indicates that the institutions made enough progress on one of the hardest supervisory issues still left over from the post-crisis reform era.

Living Wills and the Derivatives Problem

Derivatives sit at the center of this story because they expose the gap between broad crisis planning and real-world execution. A giant bank can describe a clean bankruptcy strategy on paper, but in practice its ability to survive an orderly unwind depends on what happens to massive books of swaps, options, futures, and related hedges when markets are moving fast.

That is why the living wills process keeps circling back to operational capability rather than headline capital ratios alone. Regulators want evidence that a firm can identify exposures quickly, model how positions would behave under stress, segment portfolios by counterparty and product, and execute an unwind or transfer without compounding panic across markets.

Why Derivatives Became the Weak Point in Living Wills

The 2024 feedback made clear that regulators were less interested in theoretical resolution narratives than in whether those narratives could hold up under pressure. In the earlier review, the agencies said the four banks had not adequately demonstrated how they would safely unwind derivatives portfolios in bankruptcy. That criticism went to the heart of resolvability, because derivatives can accelerate contagion when collateral calls, valuation disputes, and counterparty exits all arrive at once.

For globally active banks, the challenge is not just scale but coordination. These firms operate across legal entities, jurisdictions, and market infrastructures, often with large client-facing trading businesses layered on top of treasury and funding operations. Resolution planning has to show how the institution would keep critical functions running while shrinking or transferring complex market exposures in a way that does not trigger broader instability.

That is also why the issue remains politically and economically relevant even years after the global financial crisis. Regulators no longer judge system safety only by whether banks hold more capital or liquidity. They also want confidence that if a failure occurs, it can be managed in a way that protects depositors, reduces spillovers, and preserves market functioning without reopening the playbook of emergency public rescues.

What the Agencies Said the Banks Improved

The May 22 release did not provide a line-by-line technical roadmap of what the four banks changed, but its wording still tells investors and policy watchers something important. The agencies said the derivatives-related weaknesses identified in the 2023 plans had been satisfactorily addressed, which implies progress in the practical mechanics regulators had questioned a year earlier.

That improvement likely matters as much for supervisory credibility as for the banks themselves. If the living wills framework is to work, firms have to believe that critical weaknesses will be called out and that fixes, once made, will be recognized. Friday’s determination does both: it preserves the seriousness of the 2024 findings while showing that the process can produce measurable improvements rather than endless procedural churn.

It also provides a cleaner baseline for the next cycle. With no new shortcomings identified in the latest submissions, the debate can shift from whether the biggest banks corrected last cycle’s most visible flaws to how regulators will keep raising expectations as business models, market structure, and cross-border risks evolve.

What the Decision Means for Wall Street and Regulators

For Wall Street, the immediate takeaway is not that the sector has solved resolution planning once and for all. It is that the largest banks appear to have moved past a specific and sensitive supervisory challenge that had touched some of the most complex institutions in the system. That reduces one source of regulatory friction at a time when banks are also navigating capital debates, funding pressures, and a changing U.S. policy environment.

For regulators, the result helps reinforce the post-crisis architecture they have spent years building. Living wills are one of the clearest examples of forward-looking supervision: the goal is not to predict the next failure precisely, but to force firms and supervisors to prepare for it in enough detail that panic does not make the outcome unmanageable.

A Better Signal for Big-Bank Resolution Planning

The decision should be read as a constructive policy signal rather than a dramatic market event. Banks do not generate revenue by passing living-will reviews, and investors do not typically price these announcements the way they price earnings, capital returns, or mergers. Still, the review matters because it speaks to institutional resilience in the background of the financial system.

It also arrives at a time when regulators are under pressure to show that large-bank oversight remains both demanding and effective. Clearing the review without new deficiencies suggests the agencies are not simply lowering the bar. Instead, they are documenting that firms responded to prior criticism with changes substantial enough to satisfy the latest round of scrutiny.

That outcome may also modestly strengthen confidence in the broader crisis-management toolkit built since 2008. Resolution planning, stress testing, liquidity requirements, and cleaner legal-entity structures are all meant to work together. When one piece of that framework shows progress, it supports the credibility of the wider system.

Why Living Wills Will Stay a Moving Target

Even so, living wills will not disappear from the regulatory agenda. Banks change constantly through shifts in funding, client activity, legal structure, technology, and cross-border exposure. A plan that looks credible in one cycle may become less convincing if market plumbing changes, if a new trading concentration emerges, or if geopolitical stress affects the ability to move capital and collateral across jurisdictions.

The foreign-bank angle in Friday’s review underlines that point. The agencies said they also reviewed submissions from 56 foreign banking organizations, which shows that resolution planning is not just a U.S. domestic issue but part of a wider supervisory effort to manage global interconnectedness. In a genuine crisis, the challenge is rarely confined to one country or one balance sheet.

That is why the latest decision should be seen as progress, not closure. The biggest banks cleared a meaningful checkpoint, and regulators got the evidence they wanted on a previously contested issue. But the living wills process is designed to keep testing whether that progress holds up as the structure of modern finance keeps changing.

Living wills may never become a headline-friendly part of banking policy, but Friday’s decision shows they remain one of the clearest gauges of whether regulators believe the largest institutions can fail more safely than they could before the last crisis. For more coverage of banking regulation, market structure, and policy shifts, continue reading related reporting at Berrit Media.