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Big bank living wills: Outsourcing the obituary

The JP Morgan Chase building in New York City. This is one of the big banks that's filing a
The JP Morgan Chase building in New York City. This is one of the big banks that's filing a "living will" with federal regulators — and dealing with a potentially $9-billion trading loss.
Chris Hondros/Getty Images

The biggest U.S. banks are delivering their so-called "living wills" to the Federal Reserve and the FDIC today. This is all part of the implementation of the Dodd-Frank financial reform legislation, and it follows the stress tests that the big banks were all subjected to several months back — and that they all passed, some more auspiciously than others.

Today's plans are part one of the living-will process: banks will explain how they intend to enter bankruptcy, if they get in trouble. Obviously, a big bank could enter restructuring and emerge as a new bank, with reduced debts. Part two is more menacing: big banks are being asked to detail how they would work with the FDIC to be taken down, their assets merged with more stable institutions. That's the nightmare scenario.

It's critical that the big banks deal with both possibilities because even though we had a bunch of too-big-to-fail banks before the financial crisis, we have what I call too-bigger-to-fail banks now. The crisis forced the consolidation of failing banks into stronger ones. Additionally, big banks have been buying up weaker smaller banks. So we have a less diverse financial ecosystem now than we did before the Great Recession. This is why a big trading loss at JP Morgan, initially reported at around $2 billion but now climbing to $9 billion according to some reports, is cause for alarm. 

A significant question about the living wills is whether it's really all that advisable to have the banks generating them. It does cause critics of the whole too-big-to-fail system to ask whether the regulators are outsourcing the obituary writing — and ending up with scenarios coming from the banks that may be far rosier that anything that could happen in the real world.

Of course, living wills do imply the possibility of banks, you know, dying. Which should serve as a reminder that of you want  a high-performance late-capitalism banking system that thrives on risk, you have to plan for the occasional catastrophic crash.

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