posts | research

Ending too-big-to-fail by breathing life into “living wills”

Better Markets doubts that submitted living wills are credible or will do the job as intended. In a policy brief, Dennis Kelleher and Frank Medina call to breathe life into the “living wills” process. The Fed and the FDIC must take very important, concrete steps to make the process much more transparent and credible if they want to succeed and end too-big-to-fail, they write.

Policy brief – January 2016
24 January 2016
Better Markets

>  Ending tbtf by breathing life into living wills

Policy brief

By Dennis Kelleher and Frank Medina, Better Markets

Living wills are critical to eliminating or minimizing the threat of too-big-to-fail, but the process to date has been far too opaque for anyone to determine if the “living wills” that have been submitted are credible or will do the job as intended. The Dodd Frank Act provided regulators with substantial authority and powers to ensure that living wills are credible. To breathe life into the “living wills” process, the Fed and the FDIC must take these very important, concrete steps to make the process much more transparent and credible.

Wall Street’s biggest banks don’t want to play by the same rules as every other company in America and file bankruptcy when they fail. Just like before the 2008 financial crash, they want to continue their high-risk gambling and force taxpayers to bail them out so they don’t bear the consequences of their irresponsible if not illegal conduct.

That’s why it’s so important that the Dodd-Frank Wall Street reform law requires these banks to file so-called “living wills”, which are really just resolution plans meant to ensure that the too-big-to-fail banks can either be restructured or dissolved through bankruptcy without any taxpayer-funded bailouts. As Better Markets has outlined, living wills are critical to eliminating or minimizing the threat of too-big-to-fail.

In 2014, Wall Street’s biggest banks submitted living wills that were so grossly deficient that the federal regulators at the FDIC and the Fed flunked all 11 banks on their living wills test. In the process, federal regulators made clear the key requirements that these plans must address to ensure the American people aren’t forced to bail out Wall Street again. Wall Street’s biggest banks refiled their living wills in 2015, and it’s critical that regulators hold these too-big-to-fail banks to the public standards they set.

The credibility of the banks, as well as of the Fed and FDIC, are on the line this time in light of the very public and high-profile rejection of the plans last year. In anticipation of the regulator’s upcoming disclosure of their review of the banks’ 2015 plans, we released this week a new policy brief, Ending Too-Big-to-Fail by Breathing Life into “Living Wills”, which outlines important, concrete steps regulators must take to make the process much more transparent and credible, largely by facilitating market discipline on the too-big-to-fail banks:

  1. The regulators should provide greater information and clarity about the purposes, methods,and criteria that underlie the “living wills” process.
  2. The regulators should require greater public disclosure of the information contained in the “living wills.”
  3. The regulators should seek the input of an institution’s major creditors, potential sources offunding, and potential purchasers of assets in the “living wills” process.
  4. The regulators should establish advisory committees consisting of bankruptcy scholars, lawyers, and judges to provide them technical expertise about resolution under the bankruptcy code.
  5. The regulators should require financial institutions that submit “living wills” to disclose publicly the amount of financing necessary to effectuate a reorganization under the Bankruptcy Code and the source of that funding.