In everyday usage, living wills are advance medical directives given by individuals in anticipation of a contingency during which they may be severely ill or injured and unable to speak for themselves. They typically lay out the conditions under which the individual, if gravely ill and unable to speak for himself or herself, chooses not to be resuscitated. They also typically name a health care proxy, someone who is authorized to act on behalf of the incapacitated person who has issued the living will.
The Purpose of a Living Will for Banks
In recent years, as a result of the 2008 financial crisis, regulators around the globe have been demanding so-called living wills be drawn up by banks and financial institutions of various other sorts. A living will for a bank or other financial institution denotes a contingency plan that is on the shelf in case that entity becomes insolvent and needs to be closed, sold and/or broken up.
One of the frequently-discussed aspects of such a plan is that it may require much simpler corporate structures than are often used today by major multinational financial institutions to minimize taxes and/or to mitigate regulatory burdens. If so, restructuring financial institutions to facilitate living wills may seriously reduce their profitability, thereby restricting their ability to offer credit and perhaps also, paradoxically, reducing their financial strength.
The Implications of Having a Detailed Living Will
Another ironic twist is that rating agencies have begun to indicate that the existence of a detailed living will may force a downgrade in a company's rating. The reason is that, with a living will, it may be easier for regulators to let an institution fail if it runs into severe financial difficulties. Indeed, much of the rationale for living wills is to reduce the incidence of financial companies that are "too big to fail."
The Passage of Dodd-Frank Financial Reform Bill
The Dodd-Frank financial reform bill of 2010 mandates that bank holding companies with over $50 billion in assets must prepare living wills and file them with financial regulators. At the time of passage, over 100 banks and other financial firms were affected. A number of foreign financial firms with limited footprints in the U.S. have been seeking exemption on the grounds that they should not be deemed subject to the law based on their global size. The largest 9 banking institutions in the United States were required to file their living wills by July 1, 2012. These banks included:
- JPMorgan Chase
- Goldman Sachs
- Morgan Stanley
- Bank of America
- Deutsche Bank
- Credit Suisse
Summaries of these banks' plans are supposed to be available for inspection by members of the general public. Highlights of these living wills include (per "Banks Preparing for the End," The Wall Street Journal, June 26, 2012):
- The plans must be updated annually.
- Regulators can demand more frequent revisions.
- Troubled banks can be forced to raise more capital or to restrict growth.
- The FDIC (Federal Deposit Insurance Corporation), in consultation with the Federal Reserve, can break up a troubled bank.
Smaller banks faced a filing deadline of December 31, 2013, for submitting their own living wills.
Also Known As: Contingency plans or resolution plans for insolvent banks or financial institutions.
Historical Background: If Bear Stearns or Lehman Brothers had living wills in place before they became insolvent in 2008, some observers believe that their operations could have been wound down in an orderly fashion without precipitating the generalized, global financial and economic crisis that instead ensued. In particular, the growth of financial institutions that are deemed "too big to fail" without risking a broad-based financial and economic collapse has led to the concept of so-called living wills for these firms as a regulatory initiative designed to avoid such crises in the future.