Living Will (Banking)
A living will in banking is a resolution plan that large financial institutions are required by Dodd-Frank to file with the Federal Reserve and FDIC, detailing how the firm could be rapidly wound down in bankruptcy without destabilizing the broader financial system.
Section 165(d) of the Dodd-Frank Act requires bank holding companies with $250 billion or more in total assets, as well as designated non-bank SIFIs, to submit annual or periodic resolution plans — popularly known as living wills — to both the Federal Reserve and the FDIC. The plans must demonstrate that the firm could be resolved under the U.S. Bankruptcy Code in a rapid and orderly fashion without requiring a government bailout and without causing serious adverse effects on U.S. financial stability.
A credible living will must map the firm's legal entity structure, identify critical operations and core business lines that must be kept running during resolution, describe how interconnected entities would be separated, outline the capital and liquidity resources available to support resolution, and address cross-border coordination with foreign regulators. The complexity of the task reflects the extraordinary complexity of modern global banks, which may operate through thousands of legal entities across dozens of jurisdictions.
The Federal Reserve and FDIC review each plan and can issue joint determinations that a plan is not credible. If a firm fails to remediate identified deficiencies, regulators can impose more stringent capital, leverage, or liquidity requirements, or ultimately restrict the firm's activities or require it to divest assets. In 2016, regulators found the living wills of five major banks — including JPMorgan Chase and Wells Fargo — to be deficient.
Living wills serve as a powerful disciplinary tool even when they never need to be executed. The process of constructing a credible resolution plan forces large institutions to simplify their legal entity structures, reduce intragroup funding dependencies, and improve operational resilience — all of which reduce systemic risk during normal times as well.
The living will regime is a cornerstone of regulators' effort to make Too Big to Fail institutions actually resolvable, complementing the Orderly Liquidation Authority that gives the FDIC a non-bankruptcy resolution path as a last resort.