How to Unwind a Bank: The Debate Over Living Wills | White & Case LLP International Law Firm, Global Law Practice
How to Unwind a Bank: The Debate Over Living Wills

How to Unwind a Bank: The Debate Over Living Wills

The US Dodd-Frank Act calls for systemically important financial institutions to submit living wills, a roadmap to help wind them down in the event of a financial crisis.

The rule lays out what information firms must include in their plans, such as a complete map of business lines, corporate structure and exposures. Left unsaid by the rule, however, is when its provisions would kick in if a company begins to falter.

Ernest Patrikis, a partner at White & Case and former general counsel to AIG and the New York Federal Reserve, argues that early intervention is best. A number of S&Ls were allowed to continue to operate while technically insolvent in the 1980s, but they actually aggravated their losses rather than recovering.

Patrikis recalls a decision made while he was at the New York Fed, to cease to provide about $8bn in emergency liquidity to Franklin National Bank in 1974, at that time one of the largest bank failures in US history.

"The bank died with capital. The bank was liquidated, and there was money left over to pay the shareholders, not just the creditors. The moral is that, if banks were closed earlier, we would not have these deficits where it would be necessary for governments to step in. But there would still be valuation issues for affected assets in the market if a large institution fails," says Patrikis.

In addition to questions about when a living will may be triggered, there are also issues of cross-border regulation of insolvencies.

There is a framework for mutual recognition of cross-border insolvency proceedings -- the United Nations Commission on International Trade Law (Uncitral) model law.

Francis Fitzerherbert-Brockholes, a partner at White & Case in London, made use of the Uncitral agreement when he advised on the restructuring of troubled Kazakh banks BTA and Alliance in 2009-10, which ultimately received overwhelming creditor consent.

He says the lack of mutual recognition could cause problems for a bank with correspondent accounts across the EU, as any dissenting creditors might seek to seize assets in those jurisdictions, even if the bank had the protection of courts in the US or UK.