NCPA - National Center for Policy Analysis

"Living Will" Process Gives Massive Power to Regulators

August 13, 2014

Under the Dodd-Frank Act, large "systemically important" financial institutions are required to submit a "living will" each year, explain Abby McCloskey and Paul Kupiec of the American Enterprise Institute. The wills are plans that detail the company, its risks and its strategy in the event of bankruptcy organization.

If regulators are unconvinced that the bank has a solid plan for winding down in the event of financial problems, Dodd-Frank gives regulators the authority to make restructuring decisions and they can force firms to raise capital or downsize.

On Tuesday, the Federal Reserve and the Federal Deposit Insurance Corporation rejected 11 living wills from bank holding companies, giving the firms until July 2015 to produce satisfactory submissions. But creating a satisfactory living will is difficult, McCloskey and Kupiec explain, as there is no standard for what makes a living will acceptable, and standards will vary from firm to firm.

Additionally, regulators are armed with the power to reject these wills and require changes from companies entirely outside of a courtroom; the FDIC and the Federal Reserve make these judgments, leaving firms powerless to challenge them.

On top of these problems, it is not evident what the benefits of a living will are, according to McCloskey and Kupiec, as creditors do not participate in companies' planning.

Source: Abby McCloskey and Paul H. Kupiec, "Why the 'living will' process sets banks up for failure," American Banker, August 11, 2014.


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