Regulators say something about living wills, and are relieved that no one really cared


Banking regulators managed to say a little something about living wills yesterday, and no one really cared. American Banker and Reuters offered brief items, probably because there wasn’t much to say beyond the fact that 21 banks have a little more time to turn in their homework. But any time regulators can say something about living wills without making waves likely brings them — and banks, too — a sigh of relief.

That’s because regulators and banks are strange partners in preserving the notion — some say fiction — that the resolution plans mandated by section 165 of the Dodd-Frank Act actually work. Any suggestion that they may not work threatens to cause them heartache and pain in more or less equal measures. For them, the only press on living wills is bad press.

Anxiety about the plans is largely due to one adjective in the statute: credible. Or as Merriam-Webster defines it, "offering reasonable grounds for being believed." Under the statute, if a living will isn’t credible the Federal Reserve Board and the Federal Deposit Insurance Corp. may "jointly impose more stringent capital, leverage, or liquidity requirements, or restrictions on the growth, activities, or operations of the company." Also see the next paragraph of the statute, "DIVESTITURE."

Which makes section 165 about the only effective legal method for breaking up big banks — an idea popular in some corners, but obviously not with big banks and maybe less obviously, not with their regulators, either.

Regulators want to break up big banks only slightly more than big banks want to be broken up. They are temperamentally ill-disposed to imposing a solution that they would prefer the market arrive at on its own; hiving off sections of a bank because it failed to realistically contemplate its potential demise is not a role regulators relish. Note, also, that the law requires the Fed and the FDIC to move "jointly," and that is no small ask. Their reluctance is not shared by some legislators, of course, who see breaking up the big banks as a solid first step in bringing about a safer, fairer financial system. Tension and disagreement with legislators is another thing regulators don’t relish.

The not-so-secret secret of the entire messy process — a bank’s living will is complex, abstruse, intricate, difficult, and unbelievably long — is that no one really has any idea whether the plans will work. It’s safe to say that many educated observers hold deep reservations about the practicality of the plans, but that may not be enough to defeat the "reasonable grounds" wiggle room in meeting the definition of credible. Regulators choose between declaring a plan not credible, thus starting a tortured mechanism that requires them to take action they don’t want to take; or they can declare it credible, losing regulatory leverage, provoking hostile legislators, and having their own credibility become a matter of speculation.

So banks go through the regular motions of submitting their plans and regulators go through their regular motions of reviewing them, and then pretty much hope no one will say anything else about them. About the only constituencies with a vested interest in perpetuating living wills are the lawyers and consulting firms paid handsomely to help banks write them.

That’s a little glib. After all, the stability of the global financial system rests to some extent on the resolvability of its largest participants, which gives pretty much everyone a vested interest in credible living wills. And the plans themselves are of some value, maybe less for the break-glass-in-case-of-emergency playbook they contain, but for the planning they entail, and the changes in structure they have wrought that may have increased stability.

If nothing else, the exercise of writing a living will makes banks and their regulators a little less likely to actually have to use one. But all things being equal, they’d rather not talk about it.

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