Bair: ‘Living Will’ Plans Are Key to Ending Too-Big-to-Fail

Corporate Law Center Speaker Sheila Bair in The Wall Street Journal, April 09, 2013

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Regulators should focus on reducing interconnectedness between the large money center banks and clarifying bank wind-down roadmap plans, known as “living wills,” to reduce the necessity of taxpayer bailouts to large “too-big-to-fail” banks in future crises, former Federal Deposit Insurance Corp. Chairman Sheila Bair said in a speech at Fordham Law School Monday.

While the 2010 Dodd-Frank Act required all systemically important financial institutions to create “living wills” that would allow for “rapidly and orderly resolution” in a future crisis, Ms. Bair, who was chairman of the FDIC from 2006 to 2011, said bank regulators should be working now to make sure those plans can be executed.

The FDIC should be able to take control of a bank holding company, put it into receivership, and continue funding the bank operating units to allow for an orderly wind down or sale of assets, Ms. Bair said. That move could prevent losses caused by the ring-fencing of assets by foreign governments during a crisis, though such a strategy would need buy-in from international bank regulators, such as the Bank of England, she said.

Though that wind-down process could take some time, she said the FDIC and Federal Reserve should be taking steps now to make sure such living wills would work by disentangling mega banks’ complex relationships through moves such as limiting their interconnected transactions.

“Regulators can deal with that,” Ms. Bair said. “There’s no reason why these banks have to be so interconnected.”

Regulators also should force banks to simplify their formal operating structures and require more public disclosure about their legal structures, so that they both can be better prepared for a crisis, she said.

“Make these guys simplify their legal structure,” Ms. Bair said emphatically at the conference. “Why do they need four or five thousand legal entities that create this tangled mess?”

In the 2008 financial crisis, she said complicated legal structures slowed bank wind downs and limited the effectiveness of the bankruptcy process. But because of the bailouts, big banks missed out on the “cleansing effect” of bankruptcy, Ms. Bair said, and are “still dealing with a lot of their legacy issues,” including toxic assets and necessary mortgage restructuring.

Ms. Bair said she doesn’t think that breaking up the big banks, increasing capital requirements or reinstating Glass-Steagall reforms that split up commercial and investment banking, would be able to fix the “too-big-to-fail” problem alone. But she questioned whether banks have done enough to explain to their shareholders that they make sense as large entities, or whether they would be more valuable broken up. She said she hoped incoming Securities and Exchange Commission Chairman Mary Jo White would consider requiring banks to do this analysis, but that regulators at the agency have previously refused to require it.