Living With 'Living Wills'


The Dodd-Frank Act (the "Act") contains several provisions creating significant compliance challenges for covered financial institutions. Some of the measures will impose novel responsibilities. Some may change the way firms plan and conduct business, causing them to divest or discontinue business activities, restructure, or forego new acquisitions or activities altogether. Some will require firms to gather, store, analyze and understand massive amounts of data. One provision, however, Section 165(d), has the potential to do all of these things. Covered firms (which are bank holding companies with total consolidated assets of $50 billion or more, and nonbank financial companies designated as systemically important by the Financial Stability Oversight Council and placed under the supervision of the Federal Reserve Board, collectively called "SIFIs") need to begin to consider the implications of this significant provision.

Section 165(d) requires SIFIs to produce a plan that details how the company could be resolved in a rapid and orderly fashion in the event of material financial distress or failure. These resolution plans have come to be known as "living wills." The concept of living wills for financial institutions first gained favor in Great Britain in the aftermath of the 2008 financial crisis. The idea is that requiring firms to develop such plans in advance, forces them to review their operations, obligations, activities and exposures, and estimate how to minimize the market disruption that might result from their financial demise. This effort is intended to produce two results: First, firms finding impediments to an orderly resolution would have to change the structure, cease the activity or liquidate the exposure causing the problem; and second, upon completion of the plan, the firms would have an outline that could be followed in the event of severe financial distress.

The Act requires the Federal Deposit Insurance Corporation ("FDIC") and the Board of Governors of the Federal Reserve System ("the Fed") (collectively the "regulators"), to issue joint regulations to implement Section 165(d) by January 21, 2012. On April 12, 2011, the Board and the FDIC published a joint proposed rule regarding living wills and credit exposure reports. The public comment period is open until June 10, 2011.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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