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Soon You'll Be Able To Go To The FDIC Website And See If Uncle Jamie Left You Anything In His Will

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The term "living will," applied to liquidation plans for big banks, has always seemed like a bit of a euphemism. After all, it really means "instructions on how to divide up our stuff when we die." So, y'know, more of a regular will:

The Federal Deposit Insurance Corp. board voted unanimously today to release a joint final rule laying out what the largest and most complex financial firms must include in so-called living wills they’re required to file. The panel also approved contingency planning guidelines for insured banks. ... Regulators are requiring financial firms to file plans that are developed under the context of the bankruptcy code, with each designed to give a blueprint for how a firm could be taken apart.

And, lest your estate planning was going to be along the lines of "I must keep in good health and not die," the Feds are on to that scheme too. From the rule:

Several commenters were concerned that the Proposed Rule favored resolution over recovery and was biased in favor of separation of the insured depository institution from the parent organization rather than looking to maintain enterprise value. By issuing the Rule, the FDIC does not intend to substitute resolution planning for recovery planning. Both are very important and serve complementary purposes. The Rule, however, focuses on resolution planning.

It turns out, though, that this may be a bit of an exaggeration. In fact, the living will rules are pretty light on the actual liquidation plan. The requirements for a wind-up strategy are pretty brief and generic:

Among potential strategies for the sale of core business lines and assets that should be considered are: (a) retention of some or all of the assets in receivership, to be marketed broadly to eligible purchasers, including insured depository institutions as well as other interested purchasers, (b) sale of all or a portion of the core business lines and assets in a purchase and assumption agreement, to one or more insured depository institutions, and (c) transfer of all or a
portion of the core business lines and assets to a bridge institution chartered to continue operating the core business lines and service the assets transferred to it, as an interim step prior to the sale of such core business lines and assets through appropriate marketing strategies.

It's unclear exactly what this will mean in practice, but it seems safe to guess that Bank of America, say, will not be required to submit a living will saying "we'll sell Merrill to Morgan Stanley and our consumer assets to JPMorgan, and here are the contingent purchase agreements." Rather, the plan will say more or less "if we go to zero, the FDIC should sell our assets to the highest bidder." Which is not necessarily all that different from what they'd do without a living will.

And of course this makes sense - the FDIC should pretty much sell assets in a way that preserves as much value as possible, and it's very hard to know in advance what that will mean if you don't know exactly what the crisis is that will blow up your bank. Presumably if you'd asked European banks two years ago to draw up liquidation plans, they'd have lines like "we can use our sovereign debt for liquidity since it will always be worth par."

Rather, the real effect of the regulation is to try to get in one place a list of everything systemically-important-and-deadly for each bank. The bulk of the rule relates not to liquidation plans but rather to listing of assets, methods and systems, like:

- include "a detailed description of the processes the CIDI [covered insured depository institution, i.e. bank] employs for determining the current market values and marketability of core business lines and material asset holdings"
- "describe the interconnections, interdependencies and relationships with such major counterparties and analyze whether the failure of each major counterparty would likely have an adverse impact on or result in the material financial distress or failure of the CIDI"
- "identify and describe processes used by the CIDI to determine to whom the CIDI has pledged collateral, identify the person or entity that holds such collateral, and identify the jurisdiction in which the collateral is located"
- "identify each payment, clearing and settlement system of which the CIDI, directly or indirectly, is a member"
- "provide detailed descriptions of the funding, liquidity and capital needs of, and resources available to, the CIDI and its material entities, which should be mapped to core business lines and critical services"
- "describe systemically important functions that the CIDI, its subsidiaries and affiliates provide, including the nature and extent of the institution’s involvement in payment systems, custodial or clearing operations, large sweep programs, and
capital markets operations in which it plays a dominant role"

All of which will of course be useful to the FDIC in seizing and shopping dead banks. But it would likely be even more useful in providing a cheat sheet on how to regulate living banks - giving regulators a one-stop shop for information about how important, interrelated, and/or overexposed the big banks are. Presumably a lot of it is information that FDIC examiners already have, but putting it in one place and asking the banks to draw the connections between "here are all our clearing arrangements" and "here's what happens to clearinghouses when we melt down" has to help the regulators figure out how to do their jobs.

Best of all, bits of it will be public:

The public section of the Resolution Plan consists of an executive summary of the Resolution Plan that describes the business of the CDI and includes, to the extent material to an understanding of the CIDI: ... (iii) consolidated financial information regarding assets, liabilities, capital and major funding sources; (iv) a description of derivative activities and hedging activities; (v) a list of memberships in material payment, clearing and settlement systems ...; and (xi) a description, at a high level, of the C1DI’s resolution strategy, covering such items as the range of potential purchasers of the CDT, its material entities and core business lines.

A lot of this is probably already in publicly filed reports - since the intention of the rules is not to make public any new, sensitive information - but it sounds like we'll get a view, "at a high level," of what the big banks see when they picture a world without them in it.

FDIC Approves 'Living Wills' For Banks [Bloomberg]

Interim Final Rule [FDIC, pdf]


Banks Prove That They Are Not Too Big To Fail By Saying "We Can Fail" On A Piece Of Paper, Moving On

One way you could spend this slow week is reading the "living wills" submitted by a bunch of banks telling regulators how to wind them up if they go under. Don't, though: they're about the most boring and least informative things imaginable and I am angry that I read them.* Here for instance is how JPMorgan would wind itself up if left to its own devices**: (1) It would just file for bankruptcy and stiff its non-deposit creditors (at the holding company and then, if necessary, at the bank). (2) If after stiffing its non-deposit creditors it didn't have enough money to pay its depositors it would sell its highly attractive businesses in a competitive sale to willing buyers who would pay top dollar. This seems wrong, no? And not just in the sense of "in my opinion that would be sort of difficult, what with people freaking out about JPMorgan going bankrupt and its highly attractive businesses having landing it in, um, bankruptcy." It's wrong in the sense that it's the opposite of having a plan for dealing with banks being "too big to fail": it's premised on an assumption that the bank is not too big to fail. If JPMorgan runs into trouble that it can't get out of without taxpayer support, it'll just file for bankruptcy like anybody else. Depositors will be repaid (if they're under FDIC limits); non-depositor creditors will be screwed just like they would be on a failure of Second Community Bank of Kenosha.

Wells Fargo.Insane

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(Fifth Third Bancorp)

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