Fed requires ‘living wills’ for big banks

The Federal Reserve has signed off on a new rule requiring the nation’s largest banks to establish “living wills” that could be used to dismantle them if were to fail.

The banking regulator announced Monday it had agreed to the final rule, which was drafted jointly with the Federal Deposit Insurance Corporation (FDIC). That regulator approved the same rule back in September.

{mosads}Under the rule, banks need to provide the government with a blueprint for a quick and orderly dissolution in case they were to fail. That requirement, a key provision of the Dodd-Frank financial reform law, is intended to avoid the widespread confusion and haphazard actions that occurred during the recent financial crisis, in which some of the world’s largest financial institutions collapsed and threatened the entire financial system in the process.

By putting in place an explicit, predetermined wind-down plan, regulators hope to isolate failures by financial institutions and quickly address them while protecting the overall system.

Banks with $50 billion or more in total assets must provide regulators with a living will that will allow the government to step in and quickly wind down the bank while minimizing the collateral damage. The plans must be updated every year.

When the FDIC approved the rule, it said 37 banks with about $3.6 trillion in deposits must meet the new requirement. More could be added to those ranks if regulators eventually determine they are “systemically significant” to financial markets and merit additional scrutiny.

With the rule now in place, banks must begin submitting their plans on a staggered basis, starting with the largest banks. Institutions with more than $250 billion in assets must have plans submitted by July, while banks with more than $100 billion in assets will have an additional year to put together plans. The remaining banks requiring plans will have until the end of 2013.