Managing Risk in the Financial System
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Managing Risk in the Financial System

Edited by John Raymond LaBrosse, Rodrigo Olivares-Caminal and Dalvinder Singh

Managing Risk in the Financial System makes important and timely contributions to our knowledge and understanding of banking law, financial institution restructuring and related considerations, through the production of an innovative, international and interdisciplinary set of contributions which link together the law and policy issues surrounding systemic risk and crisis management.
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Chapter 12: ‘Living Wills’: Putting the Caboose Before the Engine and Designing a Better Engine

George G. Kaufman

Extract

12. ‘Living wills’: putting the caboose before the engine and designing a better engine George G. Kaufman1 ‘Living wills’ have recently been recommended by many analysts as an important part of any reform program to attempt to prevent or at least minimize the impact of future financial meltdowns. Such wills are included in many of the legislative proposals currently being considered in the US Congress, as well as in other countries and by the Bank for International Settlements (BIS) and the International Monetary Fund (IMF). 12.1. ‘LIVING WILLS’ ‘Living wills’ are plans or strategies to be developed by specified large complex financial institutions (LCFIs) including banks for winding down their operation if and when they become insolvent with minimum disruptions both to themselves and to the economy.2 Thus, ‘living wills’ are an attempt to achieve orderly resolutions of firms whose closure might otherwise be disruptive with higher private and societal costs than necessary. Their purpose is to focus advance attention of both a firm’s management and its regulators on problems that may arise in the unwinding of the firm when insolvency threatens including: ● ● ● Accurately inventorying all assets and liabilities, Identifying all counterparties, and Giving full recognition to the complexity of organization structures across both separately charted subsidiaries and different crossborder and structural jurisdictions. Such information should reduce the likelihood of pitfalls and make winding down more efficient when it is required and lessen the need for policy makers to consider the firm ‘too-big-to-fail’ (TBTF) with all the inefficiencies 194 LABROSSE...

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