Credible Living Wills: The First Generation
Whitepaper by Davis Polk & Wardwell LLP and McKinsey & Company
The post-financial crisis era has seen a paradigm shift in the regulation of the financial services industry. Systemically important financial institutions are becoming subject to new regulatory requirements in multiple areas including increased capital and liquidity requirements, mandatory stress tests, restrictions on their activities, higher prudential standards and recapitalization or wind-down mechanisms. Enhanced planning for the risk of failure is an important element of the new regulatory paradigm. Supervisors from the United States, the European Union and the Group of Twenty (G20) are developing requirements for systemically important financial institutions to create credible living wills. These plans will include key information about the firm and set forth actions that could be taken to reduce idiosyncratic losses and to mitigate systemic contagion in the event of financial distress, up to and including the insolvency or failure of the firm.