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Understanding Living Wills

Author

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  • Kartik B. Athreya
  • Arantxa Jarque

Abstract

The requirement for large financial institutions to file resolution plans, or \\"living wills,\\" as mandated by the Dodd-Frank Act, may mitigate the commitment problem behind TBTF. Analyzing the equilibrium of the game between banks, regulators, and debtholders, is a first step to evaluate the effect of this new policy instrument. As an alternative to regulators tying their hands so that they are not able to intervene with a bailout in the event of financial distress, living wills are meant to make the outcomes from bankruptcy better for society. This is achieved by evaluating, and guiding, choices of the firms that may improve their resolvability. If unassisted failures are more likely, in turn, debtholders who stand to lose in those failures will increase their monitoring of hard-to-regulate risk choices of the firm, further decreasing the moral hazard problem.

Suggested Citation

  • Kartik B. Athreya & Arantxa Jarque, 2015. "Understanding Living Wills," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 193-223.
    • Handle: RePEc:fip:fedreq:00036
    DOI: 10.21144/eq1010301
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    References listed on IDEAS

    as
    1. Borys Grochulski, 2011. "Financial firm resolution policy as a time-consistency problem," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 97(2Q), pages 133-152.
    2. Calomiris, Charles W. & Herring, Richard J., 2011. "Why and How to Design a Contingent Convetible Debt Requirement," Working Papers 11-41, University of Pennsylvania, Wharton School, Weiss Center.
    3. Sabrina Pellerin & John R. Walter, 2012. "Orderly liquidation authority as an alternative to bankruptcy," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 98(1Q), pages 1-31.
    4. repec:fip:fedreq:y:2012:i:1q:p:1-31:n:vol.98no.1 is not listed on IDEAS
    5. 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.
    6. Phoebe White & Tanju Yorulmazer, 2014. "Bank resolution concepts, trade-offs, and changes in practices," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 153-173.
    7. DeYoung, Robert & Kowalik, Michal & Reidhill, Jack, 2013. "A theory of failed bank resolution: Technological change and political economics," Journal of Financial Stability, Elsevier, vol. 9(4), pages 612-627.
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    Cited by:

    1. Jackson Evert & Arantxa Jarque & John R. Walter, 2018. "On the Measurement of Large Financial Firm Resolvability," Working Paper 18-6, Federal Reserve Bank of Richmond.
    2. Lisa D. Cook & Linguère Mously Mbaye & Janet Gerson & Anthony Simpasa, 2021. "Working Paper 358 - The Colonial Origins of Banking Crisis in Africa," Working Paper Series 2484, African Development Bank.

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