The Case Against the Dodd-Frank Act’s Living Wills: Contingency Planning Following the Financial Crisis
66 Pages Posted: 19 Nov 2011 Last revised: 6 Feb 2014
Date Written: August 21, 2013
The Dodd-Frank Act’s “living will” requirement mandates that systemically important financial institutions develop wide-ranging strategic analyses of their business affairs, and submit comprehensive contingency plans for reorganization or resolution of their operations to regulators. The goal is to mitigate risks to the financial stability of the U.S. and encourage last-resort planning, which will allow for a rapid and efficient response in the event of an emergency. Beyond the general framework set forth in the Dodd-Frank Act, very little is known about living wills; no legal literature currently exists on what the concept entails, and regulators have not yet finalized any rules that detail how living wills will operate. Nevertheless, living wills are perceived to be a successful regulatory solution to the problems highlighted by the recent financial crisis. Accordingly, nine of the world's biggest financial firms submitted to the regulators, and gave the public a peek at, their living wills in July 2012, as required by the new regulation.
This article focuses on two issues. First, the article examines the implementation and operation of living wills for systemically important financial institutions. Second, the article presents the problematic aspects of living wills, and how they can lead to the failure of even the most ideally planned living wills, including: (i) the difficulty in identifying and predicting risk; (ii) the failure to solve the too-big-to-fail problem; (iii) the failure to solve the cross-border insolvency problem; (iv) the costs associated with living wills; (v) the confidentiality problem; (vi) the potential failure of the living wills solution in a market-wide crisis; (vii) the problem of creating a false sense of security; (viii) the problem of contingency planning in a vacuum; (ix) the problems resulting from regulator intervention; and (x) the issue of liability and the difficulty in getting SIFI board approvals. The article concludes that living wills are merely a disclosure requirement with high expectations, but only limited power; accordingly, they should not be perceived as a comprehensive, satisfactory regulatory solution to the too-big-to-fail problem.
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