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Living wills and cross-border resolution of systemically important banks

Author

Listed:
  • Jacopo Carmassi
  • Richard John Herring

Abstract

Purpose - – 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. Design/methodology/approach - – 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. Findings - – 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. Research limitations/implications - – 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. Practical implications - – 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. Originality/value - – So far as the authors know, this is the first in-depth analysis of the information available in the public sections of living wills.

Suggested Citation

  • Jacopo Carmassi & Richard John Herring, 2013. "Living wills and cross-border resolution of systemically important banks," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 5(4), pages 361-387, November.
    • Handle: RePEc:eme:jfeppp:v:5:y:2013:i:4:p:361-387
    DOI: 10.1108/JFEP-07-2013-0030
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    Citations

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    Cited by:

    1. Flood, Mark D. & Kenett, Dror Y. & Lumsdaine, Robin L. & Simon, Jonathan K., 2020. "The Complexity of Bank Holding Companies: A Topological Approach," Journal of Banking & Finance, Elsevier, vol. 118(C).
    2. Luciano, Elisa & Wihlborg, Clas, 2018. "Financial synergies and systemic risk in the organization of bank affiliates," Journal of Banking & Finance, Elsevier, vol. 88(C), pages 208-224.
    3. Arantxa Jarque & David A. Price, 2015. "Living Wills: A Tool for Curbing Too Big to Fail," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 77-94.
    4. Satish Thosar & Bradley Schwandt, 2019. "Has ‘Too Big To Fail’ Been Solved? A Longitudinal Analysis of Major U.S. Banks," JRFM, MDPI, vol. 12(1), pages 1-14, February.
    5. Nyola, Annick Pamen & Sauviat, Alain & Tarazi, Amine & Danisman, Gamze Ozturk, 2021. "How organizational and geographic complexity influence performance: Evidence from European banks," Journal of Financial Stability, Elsevier, vol. 55(C).
    6. Mark D. Flood & Dror Y. Kenett & Robin L. Lumsdaine & Jonathan J. Simon, 2017. "The Complexity of Bank Holding Companies: A New Measurement Approach," Working Papers 17-03, Office of Financial Research, US Department of the Treasury.
    7. Bakkar, Yassine & Nyola, Annick Pamen, 2021. "Internationalization, foreign complexity and systemic risk: Evidence from European banks," Journal of Financial Stability, Elsevier, vol. 55(C).

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