Resolution planning—commonly referred to as preparing a “living will”—is one of the most transformative innovations in banking law after the 2008 global financial crisis. It represents a shift in philosophy: instead of assuming large banks will always be rescued, regulators now demand pre-planned, legally actionable roadmaps for how a failing bank can be wound down safely, without triggering systemic panic or requiring taxpayer bailouts.
This is not a bureaucratic requirement. It is a strategic, highly technical, multidimensional exercise that touches corporate structure, liquidity management, governance, insolvency law, and national security concerns.
Let’s explore it in full.
1. What is a “resolution plan” (living will)?
A resolution plan is a comprehensive document prepared by a bank that explains:
-
How the bank would be resolved if it enters severe financial distress.
-
How essential functions will continue during the crisis.
-
How losses will be absorbed internally (bail-in) instead of by taxpayers.
-
How the bank’s structure can be broken up or stabilized quickly and legally.
A living will acts like an emergency manual: a step-by-step guide for supervisors to follow before and during failure.
Regulators such as the FDIC and Federal Reserve (US), the Bank of England (UK), and the Single Resolution Board (EU) require these plans for large institutions, especially SIBs (Systemically Important Banks).
2. Why living wills exist: the lessons of 2008
Before 2008, regulators lacked the tools to wind down massive cross-border banks.
Examples:
The problem was simple:
Large banks were too complex to fail, too interconnected to liquidate, and too systemically important to ignore.
Living wills were introduced to fix this structural vulnerability.
3. Core objectives of a resolution plan
Regulators expect the plan to accomplish several goals:
a) Continuity of critical functions
A large bank performs essential functions—payments, custody, deposit-taking, clearing, trade finance.
These must continue even if the parent company fails.
b) Protect financial stability
The plan must prevent:
c) Avoid taxpayer bailouts
Resolution should rely on bail-in, not government capital injections.
d) Ensure legal and operational feasibility
The plan must work in practice, not just on paper.
It must match:
4. What a resolution plan contains (key components)
A living will is often thousands of pages.
It includes:
1. Corporate structure mapping
-
subsidiaries
-
branches
-
cross-border operations
-
intercompany guarantees
-
capital flows
This mapping identifies “pressure points” where failure could cascade.
2. Critical functions analysis
Banks identify which services must be preserved at any cost (e.g., deposit operations, card payments).
3. Preferred Resolution Strategy (PRS)
Two leading strategies exist:
a) Single Point of Entry (SPE)
The top holding company absorbs losses and undergoes resolution, while subsidiaries continue operating normally.
b) Multiple Point of Entry (MPE)
Different subsidiaries are resolved independently in their jurisdictions.
Jurisdiction, structure, and business model determine the chosen strategy.
4. Bail-in mechanics
A detailed explanation of:
-
which liabilities can be bailed in
-
in what order
-
how much “loss-absorbing capacity” exists
-
how creditors are treated
This aligns with TLAC (Total Loss-Absorbing Capacity) and MREL (EU equivalent).
5. Funding and liquidity in resolution
Banks must model:
-
how liquidity needs will change during crisis
-
how emergency funding will be sourced internally
-
which assets can be mobilized quickly
6. Operational continuity
Critical shared services must be insulated:
-
IT systems
-
risk management
-
HR
-
facility management
-
data centers
Resolution should not disrupt operations.
7. Cross-border legal analysis
Since many banks operate internationally, they must demonstrate:
-
how foreign insolvency laws interact
-
how host supervisors will be coordinated
-
how ring-fencing risks will be mitigated
8. Communication strategy
Crisis communication must prevent panic among:
-
markets
-
depositors
-
counterparties
-
employees
This is essential for trust preservation.
5. What regulators evaluate in the plan
Authorities review plans based on credibility and feasibility.
They ask:
-
Can the bank actually execute this plan within days?
-
Are operational dependencies properly controlled?
-
Are legal entities structured to support bail-in?
-
Are there enough TLAC/MREL instruments?
-
Would critical services remain uninterrupted?
-
Does cross-border coordination work in practice?
If a plan is inadequate, regulators can require major structural changes.
6. Common issues regulators find (and force banks to fix)
Regulators often criticize banks for:
a) Excessively complex legal entity structures
Some banks have over 1,000 subsidiaries.
b) Lack of operational independence
Critical services often run from one central entity, creating single points of failure.
c) Insufficient liquidity during resolution
The bank may survive on paper but be unable to fund operations for 30 days.
d) Weak intragroup funding arrangements
Capital trapped in subsidiaries is unusable in a crisis.
e) Non-credible bail-in structures
Too many liabilities are exempt or legally hard to bail in.
f) Poor cross-border coordination
Foreign regulators may not support the resolution strategy.
When these issues arise, supervisors may require:
-
divestitures
-
simplification of structure
-
relocation of services
-
issuance of new bail-in debt
-
enhancement of IT separation
7. Living wills and the end of “Too Big To Fail”
Resolution planning aims to eliminate the old dynamic where governments had only two choices:
-
Let the bank collapse → systemic catastrophe
-
Bail out the bank → moral hazard and taxpayer losses
Living wills create a third path:
orderly resolution, where shareholders and creditors absorb the losses, and society is protected from contagion.
In practice, it is still challenging:
-
Markets may panic despite the plan
-
Political pressure may favor bailouts
-
Legal differences across countries complicate resolution
But the system is unquestionably stronger than before.
8. Why living wills matter to everyday people
Most citizens never read a resolution plan, but its consequences shape their daily life.
A successful living will ensures:
-
ATMs still work
-
salaries still get paid
-
mortgages continue functioning
-
credit markets remain stable
-
the economy avoids recession
Resolution planning is financial stability insurance.
9. The bigger picture: macroprudential supervision
Living wills are a cornerstone of the global macroprudential framework.
Combined with:
They create an ecosystem that aims to keep modern banking safe and resilient—even during systemic shocks.
Final Summary
Resolution planning and living wills are not theoretical documents—they are executable blueprints that ensure a failing bank can be stabilized or wound down without chaos. They force banks to simplify structures, enhance bail-in capacity, safeguard critical functions, and prepare for cross-border insolvency challenges. Together, they represent one of the most important post-crisis reforms in global banking law.
