Economic Brief

August 2015, No. 15-08

Living Wills for Systemically Important Financial Institutions: Some Expected Benefits and Challenges

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The Dodd-Frank Act requires systemically important financial institutions to create resolution plans, or living wills, that bankruptcy courts can follow if these institutions fall into severe financial distress. The plans must set out a path for resolution without public bailouts and with minimal disruption to the financial system. While living wills can, in this way, help to curb the "too big to fail" problem, regulators face a number of challenges in achieving this goal. The authority granted to regulators by the Act, including the power to make systemically important institutions change their structures, offers promising means of addressing these challenges.

Additional Resources

Athreya, Kartik B., "Systemic Risk and the Pursuit of Efficiency," Federal Reserve Bank of Richmond 2009 Annual Report, pp. 4-20.

Avraham, Dafna, Patricia Selvaggi, and James Vickery, "A Structural View of U.S. Bank Holding Companies," Federal Reserve Bank of New York Economic Policy Review, July 2012, vol. 18, no. 2, pp. 65-81.

Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, "Agencies Provide Feedback on Second Round Resolution Plans of 'First-Wave' Filers," Joint press release, August 5, 2014.

Goodfriend, Marvin, and Jeffrey M. Lacker, "Limited Commitment and Central Bank Lending," Economic Quarterly, Fall 1999, vol. 85, no. 4, pp. 1-27.

Grochulski, Borys, "Financial Firm Resolution Policy as a Time-Consistency Problem," Economic Quarterly, Second Quarter 2011, vol. 97, no. 2, pp. 133-152.

Jarque, Arantxa, and David A. Price, "Living Wills: A Tool for Curbing 'Too Big to Fail,'" Federal Reserve Bank of Richmond 2014 Annual Report, pp. 4-17.

Kydland, Finn E., and Edward C. Prescott, "Rules Rather than Discretion: The Inconsistency of Optimal Plans" Journal of Political Economy, June 1977, vol. 85, no. 3, pp. 473-491.

Lacker, Jeffrey M., "Fed Credit Policy: What Is a Lender of Last Resort?" Journal of Economic Dynamics and Control, December 2014, vol. 49, pp. 135-138. (This article is based on a presentation that is available online.)