The purpose of this paper is to analyze whether and how “living wills” and public disclosure of such resolution plans contribute to market discipline and the effective resolution of too big and too complex to fail banks.
The disorderly collapse of Lehman Brothers is analyzed. Large, systemically important banks are now required to prepare resolution plans (living wills). In the USA, parts of the living wills must be disclosed to the public. The public component is analyzed with respect to contribution to market discipline and effective resolution of banks considered too big and complex to fail. In a statistical analysis of the publicly available section of living wills, this information is contrasted with legislative requirements.
The analysis of public disclosures of resolution plans shows that they are insufficient to facilitate market discipline and, in some instances, fail to enhance public understanding of the financial institution and its business. When coupled with the uncertainty over how an internationally active financial institution will be resolved, the paper concludes that these reforms will do little to reduce market expectations that some financial firms are simply too big or too complex to fail.
A very small data set and the necessity of cross-checking the authors' observations with all publicly available sources. The authors have also tried to infer a purpose for public disclosure of parts of resolution plans. The authorities are remarkably vague on the issue and so the authors have assumed they actually did have a specific intent that would strengthen the system.
The inference from the publicly available portion of living wills is that the authorities are a very long way from abolishing too-big-to-fail.
So far as the authors know, this is the first in-depth analysis of the information available in the public sections of living wills.
JEL classification – G01, G21, G28The support for this project was provided by the Systemic Risk Council, an independent and non-partisan council formed by CFA Institute and The Pew Charitable Trusts to monitor and encourage regulatory reform of US capital markets focused on systemic risk. The views expressed herein are those of the authors and do not necessarily reflect the views of the Systemic Risk Council, its members, The Pew Charitable Trusts or CFA Institute.
Carmassi, J. and John Herring, R. (2013), "Living wills and cross-border resolution of systemically important banks", Journal of Financial Economic Policy, Vol. 5 No. 4, pp. 361-387. https://doi.org/10.1108/JFEP-07-2013-0030Download as .RIS
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