Today, the Federal Deposit Insurance Corporation, the independent federal agency headed by Sheila Bair that regulates banks and insures deposits, announced it plans to ask a number of big banks to write “living wills” or “funeral plans,” which it describes as “analysis, information, and contingent resolution plans that address and demonstrate [the institution's ability] to be wound down or resolved in an orderly fashion.”
In a statement, Bair said, “We must recognize that not only did market discipline fail to prevent the excesses of the last few years, but the regulatory system also failed in its responsibilities. There were significant shortcomings in our approach that permitted excessive risks to build in the system. Critically, the lack of an effective resolution process for the large, complex financial institutions limited regulators’ ability to manage the crisis. As we now know, early planning and preparation is the key to avoiding bailouts. This [resolution] moves us forward to address these gaps.”
The FDIC plan would affect banking subsidiaries with more than $10 billion in assets controlled by parent companies with more than $100 billion in assets — essentially the 40 or so biggest banks. The FDIC says its plan will complement, rather than make redundant, a similar measure in Sen. Chris Dodd’s (D-Conn.) financial regulatory reform proposal. As part of the regulatory reform negotiations, Senate Democrats agreed to drop a $50 billion resolution authority fund, but banks still need to show regulators how they would break up into viable, sellable pieces.