Resolution Planning
Resolution Planning requires large US banks to prepare and regularly submit detailed plans — known as living wills — to the Federal Reserve and FDIC outlining how they could be wound down in an orderly manner during a failure without requiring a taxpayer bailout or destabilizing the financial system.
Resolution planning was mandated by Section 165(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, enacted in direct response to the 2008 financial crisis in which the government was forced to rescue or orchestrate emergency sales of failing institutions to prevent systemic collapse. The living will requirement forces large banks to confront and reduce the structural complexity that made orderly failure so difficult.
The Federal Reserve and FDIC jointly review living wills submitted by global systemically important banks (G-SIBs) and other large institutions. The plans must address the firm's organizational structure, material entities (legal entities performing critical functions), interconnections with other financial firms, funding sources, capital adequacy, and a credible strategy for rapid and orderly resolution under Title II of Dodd-Frank or the bankruptcy code. Plans must demonstrate the firm can be resolved over a weekend without systemic contagion.
Regulators have rejected or found deficiencies in living wills from major banks multiple times. When deficiencies are identified, banks must remediate them within set timeframes. Persistent deficiencies can trigger enhanced prudential requirements, including higher capital or liquidity requirements, or eventually restrictions on activities. The process has driven significant structural simplification at large US banks, including reducing the number of legal entities, establishing clean holding company structures, and pre-positioning liquidity at key subsidiaries.
The primary resolution strategy for most US G-SIBs is Single Point of Entry (SPOE): only the top-tier holding company would enter bankruptcy or be placed in FDIC receivership, with losses absorbed at the holding company level. Operating subsidiaries would continue functioning, funded by equity and debt held by the holding company. This requires holding companies to issue sufficient debt (TLAC — Total Loss-Absorbing Capacity) that can be written down or converted to equity to recapitalize subsidiaries without a government backstop.
For investors in bank holding company debt and equity, resolution planning affects the creditor hierarchy — understanding which entities issued which obligations and how losses would flow in a resolution is essential for accurately pricing credit risk.