Mercatus Scholar Hester Peirce Discusses Living Wills for Banks

Mercatus Scholar Hester Peirce discussed the importance of living wills in her commentary titled, "Living Wills' for Banks Are Pointless without Market Discipline." Ms. Peirce argues that, although living wills make sense in theory, until markets are forced to live by them, "there is little incentive to get them right."

The recent rejection of 11 living wills by regulators sent banks "back to the drawing board" because of the banks' failure to estimate or understand their customers' behavior and to make or identify changes in plans for orderly resolutions. Ms. Peirce stated that the regulators should not be surprised by the idealistic plans that were submitted by the banks. After all, she explained, "the FDIC's own assessment of how it would have resolved Lehman under its new Dodd-Frank orderly liquidation authority was grounded in similar wishful thinking."

According to Ms. Peirce, living wills do have merits. They allow firms to "think through their organizational structures and points of vulnerability," and serve as a powerful reminder to banks that bankruptcy is not a viable option for large financial institutions. In order for living wills to be meaningful to the broader public, Ms. Peirce believes that markets should be able to judge the integrity of the plans. Allowing the markets to be the assessors, Ms. Peirce stated, would "not only harness the market's broad expertise, but also would send a message that regulators are serious about allowing firms to fail without government support."

She concluded that "regulators accustomed to micromanaging financial firms likely will want to micromanage resolution."

See: Commentary: "Living Wills" for Banks Are Pointless without Market Discipline.
Related news: FRB and FDIC Provide Feedback on Second Round of Orderly Resolution Plans (August 6, 2014); Living Will Deadline for Non-U.S. Banks Approaching (with Cammarn Comment) (March 17, 2013); FDIC and FRB Release Public Sections of Second Submission of Resolution Plans for Eleven Institutions (October 3, 2013).