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Corporate Governance

: The Harvard Law School Corporate Governance Blog

Financial Institution Recovery and Resolution Plans

By Harvard Law School Program on Corporate Governance

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Editor?s Note: This post comes to us from Barnabas Reynolds, a partner at Shearman & Sterling LLP and head of that firm's global Financial Institutions Advisory & Financial Regulatory Group, and is based on a Shearman & Sterling client publication.

As part of the response to the recent financial crisis, lawmakers and bank supervisors have put forth proposals that would require some financial institutions to prepare, review, outline and report on recovery and resolution plans ("RRPs"), which are sometimes known as "living wills." Recovery plans, which come into play when a firm falls under extreme stress, outline actions to maintain the firm as a going concern. Resolution plans would be resorted to in the event of failure of a financial institution and would aim to manage its resolution in a controlled manner with minimum cost and systemic disruption.

Overview

Currently, the U.S. is considering requirements for systemically important financial institutions to develop plans to take appropriate action to reduce the risk of failure and the impact of a failure. RRPs would generally provide regulators with an inside view of a systemically important financial institution's concentration of risk. Under relevant U.S. legislative proposals, a financial institution is considered systemically important if its failure would have economically significant effects that could destabilize the financial system, with a potential negative macroeconomic impact. A systemically important financial institution would be required to prepare and provide to regulatory authorities a plan for orderly resolution in a material financial distress or failure event, intended to give regulators a more comprehensive understanding of the institution's ownership structure and exposures to and connections with other affiliated and unaffiliated institutions.

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Full post as published by The Harvard Law School Corporate Governance Blog on June 03, 2010 (boomark / email).