Set to Go Live with Living Wills, for Better or Worse

By Vartanian, Thomas P. | American Banker, August 29, 2011 | Go to article overview

Set to Go Live with Living Wills, for Better or Worse


Vartanian, Thomas P., American Banker


Byline: Thomas P. Vartanian

The FDICand the Board of Governors of the Federal Reserve System will soon finalize one of the more significant requirements of the Dodd-Frank Act - the mandate for large banking organizations and systemically important nonbank financial institutions to prepare resolution plans, more commonly known as living wills.

As proposed in Dodd-Frank, a living will would include a description of the infrastructure and financial relationships of the company, how its affiliated insured depository institutions would be protected from risks arising from nonbank activities and how it could be resolved under the U.S. Bankruptcy Code in a manner that substantially mitigates the risk that the failure would have serious adverse effects on financial stability in the United States.

The board of directors would be required to authorize the initial filing and each annual update of a living will.

In May 2010 the FDIC proposed a similar regulation requiring insured depository institutions with more than $10 billion of assets, which are owned or controlled by parent companies with more than $100 billion of total consolidated assets, to submit resolution plans.

As future regulatory and industry standards and best practices emerge, a wide range of financial companies may be required or simply find it prudent to prepare some form of living will.

On the positive side, the development of a resolution road map is likely to yield certain governance benefits to covered companies as they catalog their various operations, subsidiaries and affiliates around the globe, and examine their liquidity options and plans with regard to areas of potential vulnerability. This exercise will require a blend of resources to address complex business, regulatory, corporate restructuring, bankruptcy, information technology, intellectual property and tax issues.

Furthermore, regulators may come to rely on detailed resolution road maps as a key component of their regulatory arsenal. To the extent that such road maps make them more confident about their ability to resolve specific problem companies, it may lessen the need for general regulation of the financial industry.

But the proposal has it issues also. As it is currently drafted, it is difficult to envision how a covered company can anticipate all of the business and economic situations that may, in theory, cause it severe financial distress. These planning demands are multiplied further by the fact that while the proposed rules require living wills to prepare covered companies for resolution under federal bankruptcy law, the FDIC will rely on the same living wills to help it resolve covered companies under its special resolution powers and procedures in Title II of the Dodd-Frank Act.

One potential legal issue in the proposed regulation is the requirement that a living will should promote the interests of U.S. financial stability - an objective not expressly stated in the statute. …

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