The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), signed into law in July 2010, requires systemically important financial institutions to develop and maintain rapid resolution plans. A rapid resolution plan lays out how a financial institution that is in the process of failing can be sold, broken up or closed quickly and effectively. The Dodd-Frank Act gives regulators discretion over how such plans should be structured and what information they should contain. These standards lay out some of the key attributes of successful rapid resolution plans.
When Lehman Brothers failed in September 2008, the absence of any preparation meant that bankruptcy proceedings got off to a slow start and faced many unnecessary obstacles along the way. Much economic value was lost as a result. More importantly, in the chaos that followed policy makers became very reluctant to allow other large institutions to go under and “Too Big To Fail” became the de facto policy of the United States government. Having effective resolution plans is critical to ending the era of “Too Big To Fail” as the default policy in times of crisis.
At the highest level, there are just four standards for rapid resolution planning:
- An Objective of Low-Cost, Low-Risk Resolution. Every systemically important financial institution should produce and maintain a plan to guide receivers and regulators through a low-cost and low-risk resolution.
- Tested Provisions for a Quick Start and Sustained Execution. The plan should contain provisions for accessing basic information, starting quickly and sustaining operations of systemically-important activities. There also should be a general strategy for every major aspect of a resolution process. These provisions should be tested regularly with “war games.”
- A Well-Governed, Managed and Resourced Process. The institution, its regulators and key third parties should devote sufficient resources to planning in order to ensure that effective resolution plans are kept up to date.
- Real Consequences. Any institution with a resolution plan that is unsatisfactory to its regulators must revise it promptly and start to implement any needed operational changes. If the revisions or the changes are insufficient, the institution should be required to divest businesses and close down operations until it is no longer systemically significant.
Every element of the standards proposed here should apply to all rapid resolution plans. Still, the specifics of each plan should reflect the complexity, interconnectedness and size of the institution in question. Careful application of these standards should help regulators and institutions meet the overall objective of rapid resolution planning – namely to ensure as far as possible that no future failure by a U.S. financial institution imposes costs on taxpayers or threatens the stability of the financial system as a whole.
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