Living Wills or Phoenix Plans: Making sure banks can rise from their ashes

Wills are for when you die. Living wills guide your affairs when you lose the capacity to act. We’re all mortal and fragile – not just people, but firms and banks, too. The Dodd-Frank Act of 2010 requires systemic intermediaries (and many others) to create “living wills” to guide their orderly resolution in bad times.

In August, these Dodd-Frank living wills made front-page business news when the FDIC and the Fed rejected those submitted by the biggest banks as inadequate. That should come as no surprise. In their current form, we doubt that living wills would do much to secure financial stability...

Steve Cecchetti and Kim SchoenholtzOctober 13, 2014Living will, Too big to fail, Resolution, Bankruptcy, Bank size, Complexity, Interconnectedness, Economies of scale, Economies of scope, FDIC, Time consistency, Rules vs. discretion

Time-varying Capital Requirements: Rules vs. Discretion (again)

Among its numerous, innovations Basel III proposes that national authorities use countercyclical capital buffers to temper booms in credit growth and asset prices. [...]

Will it work? Is such a system either practical or desirable? Our view is that regardless of how theoretically attractive, making such time-varying capital regulation discretionary is unlikely to work in practice. Rules would serve us all much better.

Steve Cecchetti and Kim SchoenholtzJune 16, 2014Rules vs. discretion, Capital requirements, Time consistency, Regulatory arbitrage, Stress test

Commentary

Money, Banking, and Financial Markets