Living Wills and Pre-Commitment
20 Pages Posted: 23 Apr 2018 Last revised: 12 Jul 2018
Date Written: 2011
This Essay examines living wills through the lens of the literature on pre-commitment to bankruptcy treatment. Part I describes the living wills scheme in more detail. Part II summarizes the literature on precommitment in the bankruptcy context. It describes leading proposals for bankruptcy pre-commitment arrangements and notes some similarities and differences between those arrangements and living wills. There is a fundamental underlying similarity: both schemes contemplate the possibility that firms will identify and, at least provisionally, pre-commit to a course of action in the event of financial distress. Pre-commitment in the bankruptcy context is generally understood to involve the question of whether a firm will be reorganized or liquidated in the case of financial distress. Similarly, a living wills program appears to require firms to anticipate, among other things, whether and how some portion of the firm could be reorganized as well as the likely fate of particular assets that might be liquidated or otherwise alienated.
On the other hand, whatever the ultimate design of living wills regimes, there are some fundamental differences between them and proposals to allow firms to pre-commit to bankruptcy treatment. Most obviously, a living wills scheme is mandatory, not voluntary, and it is part of a process controlled by federal financial regulators. On a programmatic level, living wills or resolution plans will be changeable, perhaps frequently; most of the proposals for bankruptcy pre-commitment are generally premised on much more stability in a firm's commitment. Finally, some of the content of resolution plans will be confidential, and the financial services industry is pushing hard to increase the scope of such confidentiality. The bankruptcy pre-commitment proposals are premised on full disclosure.
Part III identifies some important implications for the design of a living wills program from the bankruptcy literature. The primary lesson from that literature is that if living wills provide creditors with credible information about the firm's insolvency-state treatment, they will likely influence creditors' transactions with firms ex ante. Ideally, for example, living wills might promote more efficient pricing of credit for participating firms. In any event, it is important for policymakers to understand the potential effects of purporting to create a scheme that features meaningful precommitment.
In sum, this Essay aims to illuminate some of the consequential choices of regulatory design that financial regulators across the globe face in creating living wills regimes.
Keywords: bankruptcy, financial distress, financial, regulator, federal financial
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