Understanding Living Wills

31 Pages Posted: 4 Nov 2016

See all articles by Arantxa Jarque

Arantxa Jarque

Federal Reserve Banks - Federal Reserve Bank of Richmond

Kartik Athreya

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: 2015

Abstract

The requirement for large financial institutions to file resolution plans, or "living wills," as mandated by the Dodd-Frank Act, may mitigate the commitment problem behind TBTF. Analyzing the equilibrium of the game between banks, regulators, and debtholders, is a first step to evaluate the effect of this new policy instrument. As an alternative to regulators tying their hands so that they are not able to intervene with a bailout in the event of financial distress, living wills are meant to make the outcomes from bankruptcy better for society. This is achieved by evaluating, and guiding, choices of the firms that may improve their resolvability. If unassisted failures are more likely, in turn, debtholders who stand to lose in those failures will increase their monitoring of hard-to-regulate risk choices of the firm, further decreasing the moral hazard problem.

Suggested Citation

Jarque, Arantxa and Athreya, Kartik, Understanding Living Wills (2015). Economic Quarterly, Issue 3Q, pp. 193-223, 2015, Available at SSRN: https://ssrn.com/abstract=2864235 or http://dx.doi.org/10.21144/eq1010301

Arantxa Jarque (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Kartik Athreya

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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