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If you are reading this, it means...

No B-movie or schlocky sitcom is complete without the "letter from the grave" plot device- in which the recently departed get to tell those who are left behind where the money (or the skeleton) is hidden. While ‘resolution and recovery plans' at least have reassuring alliterative potential, "living wills" is so much better. It takes the personal impact of "what would happen if I was run over by a bus" and applies it to the big picture: how we can get a bank to document how it should be taken down without wrecking the rest of the financial system?


When you are talking about systemic risk mitigation, it is difficult to mitigate the risk that your audience will systematically glaze over, so it is no surprise that this "living wills" metaphor has been so enthusiastically adopted since Mervyn King first used it at the end of last year. Choosing your own coffin and funeral march might be considered macabre, but when it comes to banks there seems to be no shortage of enthusiasts who want to get involved in the planning process....


‘Living wills' are effectively detailed resolution and recovery plans aimed at ensuring financial continuity. Regulators want to know how, why, what, and when banks would take action in the event of default, much as disaster recovery plans ensure business continuity in the event of flooding, earthquake or a pandemic. Most importantly, this is at the same time an individual and collective undertaking: banks need to outline how the domino effect could be contained. Regulators have already warned they will run ‘fire drills' to ensure every market participant can cough up the right data and document its processes at short notice.


The ultimate benefit of any upcoming living wills legislation will be a mandate for better and more relevant data, in order to identify financial and operational dependencies, both internal and external. This in turn requires a drill-down to counterparty and asset identification, counterparty hierarchy, position aggregation and accurate pricing.

Planning for life after a catastrophic collapse of the banking system used to involve booking the first business class flight out, but between Eyjafjallajokull and ready-to-erupt regulators, life after death may never be the same again.

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Gert Raeves
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Gert Raeves

Research Director

Adox Research Limited

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25 Jul 2005

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London

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