It seems that the economic turmoil that countries face across the globe is not going to be ceasing anytime soon; for example, it seems that Cyprus is the latest country to be faced with the prospect of bank bailouts. However, the financial crisis that has been churning through the world’s economies over the past several years has enabled onlookers to gain insights into how similar events can be mitigated in the future. One strategy that has been often discussed is that of the ‘living will.’

For example, two years ago, the U.S. Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board (FRB) issued a joint rulemaking with regards to the need for systemically important financial institutions (SIFIs) to plan for resolution through the preparation of ’living wills.’ This obligation would see that certain companies, those with consolidated assets of $50 billion USD or more and other specifically designated companies deemed to be of systemic importance, not only create and submit resolution plans, or ‘living wills,’ but upkeep them. These plans would allow for companies to be resolved in an orderly fashion that aligns with applicable regulations.

Several companies have submitted their plans to American regulators and the expectation for them is to maintain and modify their plans as necessary. The overall goal of this maintenance requirement is that the plans will continue to be relevant and address important issues that might impact a firm’s ability to resolve in an orderly fashion. This is absolutely critical – if an organization is to fail, particularly a systemic one, it must be dismantled in such a way as to not negatively impact the overall financial system.

Overall, living wills have clear uses. For complex organizations, particularly SIFIs, they provide a plan for shutting down that would not have to rely on government bailouts and result in financial turmoil. Even for smaller companies, they can certainly be useful in the event that it needs to shut down; making the process much more orderly and mitigating unforeseen risks.