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Living will is not a 'paper exercise', US institutions told

Thursday 21 October 2010 - by Will Henley

US banks will be forced to rewrite so-called "living wills", allowing them to be wound up more easily, if they are not up to scratch, according to the Federal Deposit Insurance Corporation.

Sheila Bair, chair of the FDIC, declared this week that systemically important financial institutions should be wary of treating the creation of these resolution plans as merely a “paper exercise”.

“The success or failure of the new regulatory regime will hinge in large part on how credible these resolution plans are as guides to resolving these companies," Bair cautioned, as she outlined how regulators would not shy away from using newfound powers to compel firms to make changes.

"It is critically important that they not be viewed simply as a ‘paper exercise’ – they must be actionable," she continued.

“The FDIC and the Federal Reserve wield considerable authority to shape the content of these plans. If the plans are not found to be credible, the FDIC and the Fed can even compel.”


Under the Dodd-Frank Act, signed into law in July, the FDIC is given receivership powers to close and liquidate systemically-important financial firms which are on the brink of failing.

The regulator recently issued a proposed rule clarifying how it would handle claims regarding financial and non-financial institutions under this new authority.

The rule makes clear that shareholders, subordinated debt and long-term bondholders will not qualify to receive additional payments above their liquidation value.

In her speech to the John F Kennedy Forum at Harvard University in Massachusetts on Wednesday the chair also hit out at the new Basel III rules. New capital requirements are not strict enough, she claimed.

“The Basel Committee recently reached a compromise on stronger standards for the quality and quantity of bank capital around the world. The standards are not as high as many of us would have liked,” she said.


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