Banking regulator signs off on 'living wills' for banks

Banks need to begin drafting "living wills" to allow the government to dissolve them in a quick and organized fashion if they fail under new rules approved by a banking regulator.

The board of the Federal Deposit Insurance Corporation (FDIC) unanimously approved a joint final rule Tuesday that tells the largest financial institutions to put together contingency plans, taking a large step toward implementing a major part of the Dodd-Frank financial reform law. The Federal Reserve, which will work alongside the FDIC in enforcing the rule, is expected to consider it in the near future.

Under the new regulations, banks with $50 billion or more in total assets are required to provide regulators with a blueprint to be used if they fail. The plan should allow the government to step in and quickly wind down the bank while the minimizing the collateral damage. It should allow depositors to receive their insured deposits within one business day, maximize the return on the sale of its assets, and minimize the loss to the institution's creditors, the FDIC said.

Right now, 37 banks with about $3.6 trillion in deposits must meet the new obligation, but more could be added. Any financial institution deemed to be "systemically significant" by federal regulators must also put together such a contingency plan, regardless of their size.

Institutions will be required to provide the FDIC with updated plans every year to reflect changes in its holdings and operations.

The rules are intended to avoid a repeat of the frenzied and haphazard events that ensued during the financial crisis, when some of the world's largest financial institutions began to quickly implode, threatening to take down others with them. By putting in place an organized wind down plan well in advance, regulators in theory will be able to shut down large banks without that drama.

The FDIC opted to take a staggered approach to implementing the new rules, with the largest firms expected to meet it first. Companies with more than $250 billion in nonbank assets would have to provide plans by July 1. Companies with nonbank assets between $100 billion and $250 billion would have an additional year to put together plans, while all other firms would have until the end of 2013.

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