EU Banks to Draft “Living Wills”

Per a formal recommendation from the European Banking Authority on Wednesday, thirty-nine large European Union banks must draft thousand-page documents known as “living wills” by the end of 2013 that will explain to regulators their precise plans for recovery and risk management in the event of an economic crisis. This marks increased international efforts to avoid another situation like the 2008 financial crisis by focusing on those banks considered “too big to fail” — banks so interconnected that their failure would warrant government intervention.

The Financial Stability Board outlined resolution frameworks last year, focusing primarily on “extra capital requirements, closer supervision and cross-border recovery,” but 13 EU banks’ submissions were deemed unsatisfactory, and those institutions have been asked to resubmit this year.

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Successful proposals should outline how the bank would survive without the help of taxpayers, that is, which parts of the business could be cut or restructured in order to maintain basic operations. The FSB includes members of all Group of 20 (G-20) leading economies, which together account for over 80 percent of world trade and the gross world product. EU banks must notify the EBA by March 23, 2013, if they plan to comply with the recommendation.

Last summer, Bank of America (NYSE:BAC), Barclays (NYSE:BCS-PD), Citigroup (NYSE:C), Credit Suisse (NYSE:CS), Deutsche Bank (NYSE:DB), Goldman Sachs (NYSE:GS), JPMorgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS), and UBS (NYSE:UBS) submitted living wills to the Federal Deposit Insurance Corp. in the U.S., and over 100 other banks are expected to do the same this year.

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