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Banks Balk at Writing Their Own Living Wills

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What if your bank is too big too fail, but fails anyway? As part of the sweeping bank reform law known as Dodd-Frank, big banks must write up living wills for themselves, essentially creating roadmaps for federal regulators on how to dismantle them if the companies drive themselves into bankruptcy and federal ownership (like Lehman Brothers did in 2008).

But the requirement to write living wills, called resolution plans, is getting lots of pushback from some major banks, who fear they could be turning the keys to their fortunes over not just to federal bureaucrats, but also their competitors. The plans must include detailed information about firms’ organizational structure, connect the dots between different products and the business entities legally responsible for them, and describe how all the separate companies under the big firms’ corporate umbrellas are managed.

That sounds like a cumbersome mess, according to many bankers. The rules “should not create a system that manages for failure rather than for success,” according to a letter to the FDIC by the American Bankers Association and five other industry associations.

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Some bankers wonder whether it’s even possible to comply with the new rules, which create “an essentially unbounded requirement to develop a resolution plan covering a multitude of speculative scenarios in order to attempt to satisfy an unattainable regulatory standard,” David T. Hirschmann, president for the Center for Capital Markets Competitiveness of the U.S. Chamber of Commerce, wrote in his letter to the FDIC.

In response to widespread criticism of the effort by people in the banking industry, FDIC Chairwoman Sheila Bair defended the new rule, saying the process may force companies to analyze and change corporate structures that may not make sense.

“(W)e do have the tools to make these complex behemoths simplify and rationalize their legal structures with their business lines so that if and when they get into trouble, their individual business units can be quickly broken apart and sold off into the private sector,” Bair said in a written statement.

At least some bankers are inclined to agree. James Powers, a lawyer for Wells Fargo, wrote in his letter to the FDIC that simply going though the process of writing its own living will has forced Wells Fargo to discover places where its corporate structure needs to change.

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