Banking Resolution Planning

Banking resolution planning is the work, done in advance by banks and public authorities, of setting out how a bank could be resolved if it failed: which parts would be kept running, which sold or wound down, who would absorb the losses and how the process would be funded. The resulting documents are called resolution plans, and in the United States they are widely known as "living wills".

Planning sits between day-to-day supervision and the emergency itself. It is carried out under the regimes that give powers to a bank resolution authority, and it is paired with recovery planning, in which the bank describes how it would rescue itself in a crisis. Together they respond to a lesson of the 2007 to 2009 crisis: large banks were so complex that authorities felt they had no option except a bail-out.

A personal will tells your family what to do with your affairs if you die: who gets what, where the documents are, who to call. Without one, relatives can spend months untangling accounts while bills go unpaid.

A bank's living will serves the same purpose, but for the bank itself. It explains how the bank is put together, which of its services matter most to customers and the economy, and how those services could keep going if the rest of the bank had to be closed or sold. The authorities read it, test it and send it back for improvements long before it is needed.

Section 165(d) of the Dodd-Frank Act requires the largest bank holding companies and certain other firms to submit plans for their rapid and orderly resolution under the US Bankruptcy Code. The Federal Reserve and the FDIC review them jointly. If both agencies find a plan deficient and the firm does not fix it, they can impose stricter capital, leverage or liquidity requirements, restrict growth, and ultimately require divestitures. Filing frequency and content are tiered by size and risk, with the global systemically important banks filing most often.

Separately, the FDIC requires large insured banks to file plans showing how the bank itself could be resolved under the Federal Deposit Insurance Act. The FDIC revised that rule in 2024, requiring full plans from insured banks with 100 billion dollars or more in assets and more limited submissions from those between 50 and 100 billion dollars.

Under the EU Bank Recovery and Resolution Directive, resolution plans are drawn up by the authorities, chiefly the Single Resolution Board for significant euro area banks, using information supplied by the banks. Each plan sets a preferred resolution strategy and a minimum requirement for own funds and eligible liabilities (MREL), the debt that can be written down or converted in a bail-in. In the United Kingdom, the Bank of England runs the Resolvability Assessment Framework, under which major banks assess their own readiness for resolution and both the banks and the Bank publish summaries, first released in 2022.

• Critical functions. Services whose sudden stop would harm the economy, such as deposit-taking, payments and lending to businesses.
• Structure and interconnections. Legal entities, core business lines, shared services, intragroup funding and links to financial market infrastructures.
• Strategy. Whether authorities would resolve the group from the top, known as single point of entry, or split it at several points, known as multiple point of entry.
• Loss absorbency. Enough capital and bail-in debt, including the Financial Stability Board's total loss-absorbing capacity standard for global banks.
• Operational continuity and funding. How staff, systems and contracts would keep working, and how the bank would meet liquidity needs in resolution.

A recovery plan is written by the bank and describes actions it could take itself while still a going concern, such as raising capital, selling businesses or cutting risk-weighted assets, with indicators that trigger action. A resolution plan describes what happens after the bank has failed or is about to, when authorities take over. Supervisors review recovery plans; resolution authorities own or review resolution plans. The two should fit together, so that if recovery fails, resolution can begin without delay.

Living wills have been criticised as enormous documents that cannot capture how a real crisis unfolds. The 2023 failures of Silicon Valley Bank and Credit Suisse revived these doubts: SVB's parent was not required to file a holding company plan under the size-based tailoring rules then in force, and Swiss authorities chose a merger rather than the resolution plan prepared for Credit Suisse. Supporters argue that planning has nonetheless forced banks to simplify their legal structures, hold more loss-absorbing debt and map critical services, which makes resolution more credible and reduces moral hazard. Funding the process is covered under bank resolution fund.

• Single Resolution Board
• Federal Deposit Insurance Corporation