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June 28, 2012 at 10:15 AM
Sunday marks the deadline for the largest banks with operations in the U.S. to submit so-called “living wills” to regulators who under Dodd-Frank have unprecedented new powers to unwind banks in the event a new financial crisis triggers defaults.
The “living will” documents, expected to number many thousands of pages, will enable the Federal Reserve and the FDIC to jointly supervise and disentangle if need be “systemically important” banks, either through bankruptcy or the forced sale of subsidiaries. The Sunday deadline applies to the five largest U.S. banks and to four foreign banks with a significant U.S. presence.
Simon Johnson (left), an MIT professor and member of the FDIC’s Systemic Resolution Advisory Committee, in an interview with AdvisorOne, gave the living wills a mixed review.
“Living wills play an important role going forward because they force the banks to lay out how they can be liquidated,” he said. “But will we ever be able to use a living will to shut down a bank? I’m skeptical.”
Johnson also endorses Sen. Sherrod Brown’s (D-OH) Safe Banking Act, which supporters say would shrink the largest U.S. banks to a size that would not jeopardize the health of the financial sector or U.S. economy more generally.
“I favor making the country’s banks small enough and simple enough so that nobody is too big to fail,” he says.
But neither living wills nor Brown’s legislation, which would take a long time to become law if it ever gets that far, matches the urgency of forestalling the imminent danger posed by banks, Johnson says.
Johnson, the co-author of two popular books that critique the ways of both Wall Street and Washington, worries that “when the history of [the current financial crisis] is written, 2008 will look like the precursor to the big crisis in Europe, which will spread to the rest of the world.”
