US watchdog calls in experts to draft 'living wills' for banks

Regulator wants to have plans ready to rescue or wind up institutions in future crises

US regulators will draft "living wills" for the country's biggest banks before the institutions provide their own versions of the worst case economic survival plans.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was introduced to prevent another financial meltdown, banks will have to draw up the plans over the next two years. Living wills provide recovery and resolution plans: the former details ways of saving institutions when under severe economic stress, the latter is a guide to winding down the business without causing a shock to the economy.

However, the Federal Deposit Insurance Corporation (FDIC) is taking no chances that the banks will provide sufficiently detailed wills. It has invited corporate advisory firms to pitch to join a panel that will draw up early versions of the wills, to give the regulator a benchmark with which to measure the detail of the banks' plans.

KPMG, Deloitte, PricewaterhouseCoopers, Oliver Wyman, and FTI Consulting are among those that are thought to have been approached by the FDIC. Appointments are expected some time this quarter.

"The request for proposals is looking for a panel of firms to do an independent approach to how the wills might be written," said a source whose firm is looking to get on the panel.

British advisers will get drawn into helping devise any drafts. The banks that are being forced into establishing the wills have assets of $50bn or more, while the other financial institutions included are those considered systemically important to the US economy. Inevitably, much of the work these massive corporations conduct takes place in London. The source added: "All of these institutions have sizeable London offices and London is the derivatives capital of the world."

FDIC chairman Sheila Bair has welcomed her organisation's beefed-up powers, arguing that the ability to either wind-down a bank or lead it to sell-off assets to ensure survival will ensure economic stability. She recently said: "The powers to implement an FDIC liquidation of a systemic financial company during a future crisis give us the tools to end Too Big to Fail and eliminate future bailouts."

In a report earlier this month, the FDIC insisted that had these "wind-down" powers existed when Lehman Brothers collapsed in 2008 there would have been a far less severe impact on the global financial system.

There are critics. Billionaire financier George Soros has described living wills as "not convincing".

In Britain, the Financial Services Authority instructed six banks to draft living wills, which the regulator is still examining. HSBC, Barclays, Royal Bank of Scotland, Standard Chartered, Lloyds and Santander all submitted wills. Accountants Deloitte, KPMG, and Ernst & Young are advising at least one bank each.

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