Resolution Planning Using Living Wills Becomes a Necessity After Financial Crisis

On July 1, nine of the largest U.S. financial companies and foreign financial companies with operations in the U.S. filed living wills required under a joint rule

adopted by the Federal Deposit Insurance Corporation and the Federal Reserve. Now that the initial plans have been filed, the real work begins.

 

One of the clear lessons from the financial crisis is that more effective planning is essential if a destabilizing collapse, like Lehman’s bankruptcy, is to be avoided.

Given this, both the regulators and the filing companies have a great stake in making progress. For the regulators, the living will process poses tough questions about how internationally active financial companies can be wound down and, if not, what should be done to limit the risks.

Obviously, the stakes are equally high for the companies. Credible resolution plans may reduce the pressure for more

draconian action or additional liquidity and

capital buffers.

 

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