'Living wills' for banks bear semblance to personal version

A living will is a somewhat novel concept for a corporation. The idea appears to be borrowed from personal living wills, which direct the chosen proxy and other parties to a person's health care wishes should they become incapacitated. In the same way that big bank 'living wills' are meant to prevent financial system turmoil, a personal living will can prevent turmoil and angst amongst family and loved ones in the Sacramento area.

Last week, the FDIC began the process of reviewing the 'living wills' of nine of the largest and most important banks to the U.S. financial system. The living wills are required by the Dodd-Frank legislation in an attempt to prevent future financial chaos similar to that present during the widespread bailouts and bank failures of the late 2000s. The Dodd-Frank Act requires these institutions to produce plans for the companies to proceed to bankruptcy in an organized fashion should any bank find itself in an irredeemable financial state.

During the emotional time following a person's serious injury or illness, reasonable friends and family members can have differing opinions as to what that person might want as far as health care. But the living will can put those opinions and accompanying turmoil to rest with a clear and decisive directive in the event of a person's incapacitation.

This is an interesting tack to take with big banks, whose health, as we have seen, has the power to affect, to a large degree, the overall health of the U.S. economy. It is yet to be determined how the FDIC will enforce the terms of the living wills, but the hope is that they will work like a personal living will and help avoid a protracted legal battle over a financial institution's bankruptcy, just as a personal living will can clarify a person's intentions regarding end of life care and life-sustaining medical treatments.

Source: Bloomberg, "Big Banks to Reveal Summaries of Living Wills July 3, FDIC Says," Jesse Hamilton, June 29, 2012.

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