OFR Brief Examines Living Wills Prepared by Eight U.S. G-SIBs

What would happen if a large U.S. bank were to fail?

The Dodd-Frank Act of 2010 requires the largest U.S. banks to submit plans to regulators on how they could be wound down after a potential failure without disrupting the financial system. These plans are known as resolution plans or living wills. Eight global systemically important banks (G-SIBs) are based in the United States.

The OFR published a brief today analyzing the public portions of the 2014 and 2015 living wills of these eight banks. The authors find that the public information does not provide enough detail to determine if a failing bank could be unwound without government aid.

However, even with those limitations, the information appears to confirm the concerns of regulators. The Federal Reserve and Federal Deposit Insurance Corporation recently rejected most of the U.S. G-SIBs’ 2015 living wills.

Authors Steve Bright, Paul Glasserman, Christopher Gregg, and Hashim Hamandi find the public portions of living wills include relatively little data, but based on the data available, U.S. G-SIBs do not appear to have simplified their organizational structures much.

The brief cites three areas in the public portions of resolution plans that could be improved.

First, organizational complexity is a big issue for the largest banks. The simpler the structure of a G-SIB, the easier it is to resolve. G-SIBs have done little to streamline their core businesses since 2013, according to the OFR analysis. However, the living wills’ public sections offer only a rough idea of how these banks would manage this complexity in a failure.

Second, data on corporate structures could be more transparent. The brief compares information about those structures in the living wills with the information in another regulatory database, the Federal Reserve’s National Information Center. The NIC database counts many more legal entities within each G-SIB than the public living wills do. However, the NIC information about what those entities do is largely generic. The information does not provide enough detail to understand the thousands of entities and the challenges of unraveling these companies. The public sections of living wills offer little additional information.

Third, cross-border operations present challenges. A G-SIB’s home country and host country may have competing interests. Host countries may protect local interests by shielding local subsidiaries from foreign claims and thus making resolution harder. More public information on G-SIBs’ cross-border operations would be helpful.

The OFR researchers’ findings also support the recent conclusion of the Government Accountability Office, which noted a lack of transparency in the public portions of the living wills.

The brief calls for more standardization and consistency in reporting when the G-SIBs submit their next living wills on July 1, 2017.

Stacey Schreft is Deputy Director for Research and Analysis at the Office of Financial Research