Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, says the best way to end too-big-to-fail is by using resolution plans, also known as living wills.
The Richmond Fed president believes that without robust or credible resolution plans other financial reform plans will be incomplete and fall short of Dodd-Frank's intended goals.
"The only approach I can envision to answering such questions is resolution planning — that is, the hard work of mapping out in detail just what problems the unassisted bankruptcy of a large financial firm as it’s currently structured might encounter," Lacker said in his prepared testimony Thursday.
He added, "Such maps would provide an objective basis for judgments about how the structure or activities of such firms need to be altered in order to give policymakers the confidence to choose unassisted bankruptcy in the event of distress, but without going too far and unnecessarily eliminating efficiencies associated with economies of scale and scope."
The Dodd-Frank Act requires that bank holding companies larger than $50 billion in assets — as well as nonbank financial companies supervised by the Federal Reserve — submit resolution plans annually to the central bank as well as the Federal Deposit Insurance Corporation.
Furthermore, a living will is a description of an institution’s strategy for resolution under the U.S. Bankruptcy Code in the event of a financial distress or failure.
"The heart of the plan is specification of the actions the firm would take to facilitate rapid and orderly resolution and prevent adverse effects of failure, including the firm’s strategy to maintain operations of and funding for their material entities," Lacker explained.