Sen. Shelby wants 'living wills' for the country's largest financial companies

The Senate Banking Committee’s top Republican on Monday said the government should require large firms to have the financial equivalent of “living wills.”

Sen. Richard Shelby (R-Ala.) said he wants those firms to have formal plans in place for dealing with future economic crises to avoid the need for future government bailouts. He also wants the federal government to beef up the bankruptcy process.

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Shelby, who opposed the $700 billion Wall Street bailout last year, said at the Oxford Union that the government should create a “nimble resolution regime” akin to bankruptcy proceedings to deal with failing firms that threaten the financial industry as a whole.

The Senate Banking Committee is in the early stages of debating wide-ranging financial legislation, and the issue of firms that are “too big to fail” remains one of the thorniest matters for lawmakers.

Chairman Chris Dodd (D-Conn.) released a draft bill earlier in November, but he is still working on the broad outlines of the legislation with Democrats and Republicans.

The Obama administration backs creating a new policy to wind down firms through a government-run fund financed through assessments on financial firms. Republicans have consistently criticized that proposal as perpetuating government bailouts.

The administration defends the idea as a way for future administrations to dissolve big firms without having to turn to Congress in emergency situations for bailout money.

Shelby said on Monday that “it is time to reverse the trend of increasing government bailouts and return to market discipline and due diligence by investors.”

Shelby said he supported a series of pre-emptive measures for regulators and financial firms, including “stress tests” to measure systemic stability.

“Incentives and new rules should limit reliance of large firms on short-term financing and create capital, liquidity and supervisory requirements that grow smoothly with institution size, to reflect growing risks,” Shelby said.

Shelby said large firms should keep “living wills” on how they would deal with future crises and that the government should consider promoting “contingent capital,” debt that can be turned into equity.

Shelby said that a “nimble” resolution system should be similar to bankruptcy proceedings and may need to provide rapid access to liquidity.

“Short-term resources necessary to avert panics and runs must be available promptly, but must not lead to taxpayer losses,” Shelby said.