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Connectedness and ContagionProtecting the Financial System from Panics$
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Hal S. Scott

Print publication date: 2016

Print ISBN-13: 9780262034371

Published to MIT Press Scholarship Online: January 2017

DOI: 10.7551/mitpress/9780262034371.001.0001

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Living Wills

Living Wills

Chapter:
(p.219) 18 Living Wills
Source:
Connectedness and Contagion
Author(s):

Hal S. Scott

Publisher:
The MIT Press
DOI:10.7551/mitpress/9780262034371.003.0018

This chapter focuses on living wills. Delayed insolvency resolution means more time for short-term creditors to run, and loss of franchise value. Following the financial crisis of 2007 to 2009, many believe these risks are acute for large, complex, or otherwise systemically important nonbank financial institutions as well as banks (including bank holding companies). Living wills are intended to make resolution faster. But a faster procedure cannot assure short-term creditors of an unimpaired recovery of their investments, so they will not deter those creditors from withdrawing as soon as a struggling financial institution appears to be in danger of failing. It is argued that living wills should focus on a key systemic risk posed by the failure of a few financial institutions—the potential loss of the provision of critical functions like clearing and settlement.

Keywords:   living wills, short-term creditors, financial crisis, insolvency resolution, banks, nonbank financial institutions, systemic risk

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