Banks to change assumption on living wills


"Living wills" are designed to facilitate the orderly wind down of big banks that run into Lehman Brothers-like liquidity issues.

The point is to put these banks out of their misery without a costly TARP-like effort. That is, without keeping taxpayers on the hook for the banks' mistakes. The fact that TARP turned a profit on many "investments" is irrelevant.

The latest round of living wills submissions is due to regulators this summer, but regulators are warning that banks need to take a different approach on a key assumption. Until now, banks had assumed that regulators around the world would work in concert in the face of global market shocks. But the Financial Times reports that the Federal Reserve and the FDIC are advising banks not to count on such cooperation as they file their plans.

Several bank executives told the paper the guidance was "shocking" and "left them believing regulators were losing confidence in their ability to improve on 2008 when countries either failed to co-operate, or even fought over assets, in banks."

Hopefully, when push comes to shove, we'll see a level of cooperation that gives banks what they need from regulators in a timely fashion. While many smaller jurisdictions will always go their own way, often for political reasons, there's reason to hope that U.S. and U.K. regulators as a whole will come up with a coordinated response. The last thing anyone wants is a messy wind down that craters the markets and puts other banks at risk.

The problem is there is no real-world test of these living wills. When the global shock comes, I can only hope they work as designed.

For more:
- here's the Financial Times article

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