Tags: banks | living | wills | demise

Experts: ‘Living Wills’ May Actually Kill Off Big Banks

By    |   Tuesday, 03 Jul 2012 12:36 PM

Banks will be planning their own demise by completing government-mandated "living wills," experts warn.

The Dodd-Frank Act requires large banks seen as "too big to fail" to plan how they would be dismantled if they're wrecked by a financial crisis. The living wills, which must be submitted to regulators by Monday, are supposed to help avoid more bank bailouts.

The Dodd-Frank Act also requires banks to have enough capital to survive a financial crisis. Supporters of living wills and other Dodd-Frank provisions say the banking rules will help avoid another financial melt down.

Dodd-Frank critics like Rochdale Securities analyst Dick Bove say the government wants to break up large banks, according to CNBC.

"If the regulators think about what is happening here, they also might be demoralized by Congress’ lack of faith in them," Bove stated in an analysis for clients, CNBC reports. "However, the FDIC enlivened by this legislation has already prepared its prescription of what should be done to dismember large banks."

Requirements to hold more capital won't always save banks, Matt McCormick, portfolio manager of Bahl & Gaynor told CNBC. Their demise will come from unforeseen circumstances, he says, citing Dexia, a Franco-Belgian bank that was bailed out despite having plenty of capital.

"When you look at a living will on a personal situation, when you implement it, it still results in death," he told CNBC. "If any one of these banks go out, the consequences for all banks as well as the market are catastrophic."

Though banks have rallied over the past month, McCormick said the regulatory environment is one reason he wouldn't buy big U.S. financials.

"My answer is, avoid them," he said. "Buy the Canadian banks, buy high-quality dividend-paying stocks. You don't have to own these guys. I don't want to own something that is already planning for its own demise."

The living wills are meant to help regulators orderly unwind failed banks without disrupting the entire economy, according to a Reuters blog.

"Seen in a positive light," according to Reuters, "the rules could provide a chance for firms to streamline their complex corporate structures and enhance their risk management systems on a real-time basis, allowing their senior managements to be informed of time sensitive risk measures such as counterparty exposures, amount and quality of collateral and collateral arrangements."

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Tuesday, 03 Jul 2012 12:36 PM
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