Living Wills and Pre-Commitment
American University Business Law Review, Vol. 1, No. 1, 2011
20 Pages Posted: 30 Nov 2011
Date Written: November 17, 2011
Among many other things, the Dodd-Frank Act of 2010 requires large bank holding companies and systemically important non-bank financial institutions to prepare plans for their resolution – living wills – in case they experience financial distress. Living wills have emerged as one of the few innovative aspects of recent financial regulatory reforms around the globe, and yet they have attracted relatively little attention and commentary compared to other reforms. Living wills have the potential to be a significant tool for financial regulators who aim to avoid systemic crises and taxpayer bailouts, but much depends on regulatory design and practice. With questions of design and practice in mind, this Essay emphasizes some basic similarities between living wills and proposals to allow parties to pre-commit with respect to bankruptcy. Like contracting about bankruptcy, living wills potentially involve firms making some form of commitment or strong prediction regarding their insolvency-state treatment. Considering the nascent living wills regime through the lens of this literature on bankruptcy law underscores some important potential consequences of regulatory design. Most notably, if living wills do purport to reflect some meaningful degree of commitment, and if the contents of the wills are disclosed to regulated firms’ counter-parties, these counter-parties are likely to adjust to the plans if they can. Thus, financial regulators should be mindful of the potential ex ante effects of living wills and they should aim clarify to market participants as much as possible how they intend to utilize the wills in the event of a firm’s financial distress.
Keywords: banks, banking law, financial regulation, living wills, bankruptcy, contract, systemic risk, resolution, resolution plans
JEL Classification: G15, G18, G20, G21, G28, K23
Suggested Citation: Suggested Citation