Living Wills & Banks Too Big to Fail

Living Wills & Banks Too Big to Fail
The FDIC has announced new rules for major (or “systemically important” as the FDIC calls them) U.S. banks and financial institutions beginning in 2012. These institutions are now required to submit detailed plans on how their assets should be handled in the event of another financial meltdown like the one that occurred in 2008.  The rules would also extend to foreign banks with a significant presence in the U.S.  The new rules are intended to allow the FDIC to quickly sell off assets when a bank collapses, thereby minimizing the economic carnage.

The Banking Industry
The rules were first seen in the Dodd-Frank Wall Street Reform and Consumer Protection Act, penned by U.S. Senator Barney Frank and former U.S. Senator Chris Dodd. That bill was signed into law by President Obama in 2010 and it was aimed at eliminating the corrupt practices that led to the 2008 banking collapse.  Two specific provisions were set up to prevent taxpayers from footing the bill if and when another major bank goes under.  The provisions are known as Living Wills (Title I), and Orderly Liquidation Authority (Title II).

Under Title I, banks and financial institutions are required to give the FDIC a “living will” so that things like the company’s assets, liabilities, and organizational structure are known if the company should collapse.  With this information, the FDIC can exercise its orderly liquidation authority in a timely and efficient manner, selling off the company piece by piece until all of its debts are satisfied.

Title II expressly forbids taxpayer bailouts of failing financial institutions such as the 700 trillion dollar bailout given in the TARP program. It also prevents shareholders from collecting any payments until all other claims are paid.  All of Title II’s provisions are designed to prevent taxpayers from suffering any hardship to save failing financial institutions and to prevent the FDIC from profiting from the sale of assets in any way.

The Dodd-Frank Act is America’s way of telling big banks and financial institutions that no company is too big to fail.  Companies that engage in unethical practices will now be held accountable for all the problems they create.  Perhaps most importantly, Title I and Title II of Dodd-Frank ensures that American taxpayers will never have to take a hit to save Wall Street again.