On Monday, regulators rejected the "living wills" drawn up by BNP Pariabas, Royal Bank of Scotland and HSBC. These plans, required by the Dodd-Frank financial reform legislation passed in 2010, are supposed to help end the era of "Too Big To Fail" by making systemically important financial institutions plan for their own demise.
But what is a "living will" for a bank?
Oliver Ireland, partner in the financial services practice at Morrison and Foerster, says it's about having a plan that maps what happens after a bank's failure. "Is this going to solve all the problems? Probably not," says Ireland. "But, if you thought about it ahead of time, you're going to be in a lot better shape than if you haven't."
Mike Konczal, fellow at the Roosevelt Institute, says the shortcomings the Federal Reserve and FDIC have found in some banks' "living wills" are in part about inadequate analysis of interconnections.
Rob Johnson, president of the Institute of New Economic Thinking, says inadequate "living wills" are themselves a product of incentives: Bankers would prefer to see their companies — and their stock options — bailed out.
"They have a stake in having a muddy or bad or not-credible living will," says Johnson.
BNP Paribas, the Royal Bank of Scotland and HSBC must submit new plans by Dec. 31.
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