Resolution Plan

A Resolution Plan (also known as a 'Living Will') is a comprehensive strategy that large, complex financial institutions must prepare to demonstrate how they could be wound down in an orderly manner if they were to fail. Think of it as a pre-packaged bankruptcy plan for a banking giant. Its primary goal is to prevent a repeat of the chaotic government bailouts seen during the 2008 Financial Crisis. Mandated by regulations like the Dodd-Frank Act in the U.S., these plans force banks to map out their own demise, identifying critical functions, untangling complex legal structures, and outlining a clear path to resolution without triggering a wider financial panic or relying on taxpayer money. The plan must be credible and actionable, providing regulators like the Federal Reserve and the FDIC with a viable roadmap to safely dismantle a failing firm. This preemptive planning aims to solve the “too big to fail” problem, ensuring that even the largest players in the financial system can fail without taking the entire economy down with them.

The 2008 crisis taught a painful lesson: when a massive, interconnected bank teeters on the brink, its collapse can threaten the entire global financial system. This left governments with a terrible choice: let the firm fail and risk economic catastrophe, or prop it up with billions in taxpayer-funded bailouts. This dilemma is known as the “Too Big to Fail” problem. Resolution plans are the regulatory answer to this problem. The logic is simple: if a bank has a clear, pre-approved plan for its own funeral, regulators can manage its failure without triggering a market meltdown. It forces a bank’s management to confront its own complexity and create a step-by-step guide for disassembly. This shifts the burden of failure from the taxpayer back to the company’s owners and creditors, where it belongs. The goal isn't to save the bank—it's to save the system from the bank.

While the full documents are confidential and incredibly detailed (often running thousands of pages), they all follow a standard structure designed to answer one key question: How do we let you die gracefully? Key elements include:

• The Blueprint: A detailed map of the company's corporate structure, showing all legal entities, major business lines, and how they connect across the globe. This helps regulators quickly understand what they are dealing with.
• Critical Operations: An inventory of the bank's essential services—things like payment processing, clearing trades, and managing customer assets. The plan must show how these vital functions can continue operating, even as the parent company is being wound down, to prevent disruption to the wider economy.
• The Strategy: This is the heart of the plan. It outlines the specific resolution strategy to be used. Common approaches include:
  1. Single Point of Entry (SPOE): A strategy where only the top-level parent holding company is put into bankruptcy. The critical operating subsidiaries underneath it are kept alive and running, recapitalized by converting the parent company’s debt into new equity through a Bail-in.
  2. Multiple Point of Entry (MPOE): A strategy for complex global banks where different national regulators could resolve the local entities in their respective jurisdictions.
• Fire Sale Prevention: A plan for selling off assets or entire business lines in a controlled way to avoid a desperate, value-destroying fire sale that could crater market prices. This might involve transferring certain operations to a temporary Bridge Bank managed by regulators.

For a value investor, the details of a resolution plan are less important than what its existence signifies. It provides a unique lens through which to assess the risk and quality of a financial institution.

Warren Buffett famously advises investors to “never invest in a business you cannot understand.” A bank that requires a multi-thousand-page “living will” to explain how it could be safely dismantled is, by definition, an extraordinarily complex entity. For many value investors, this complexity is a major red flag. It obscures the true financial health of the firm and introduces risks that are nearly impossible for an outsider to fully analyze. Simpler, more focused banks are often far more attractive because their risks are more transparent.

While you can't read the full plan, you can read the public feedback from regulators. The Fed and FDIC periodically review these plans and issue a public determination on whether they are “credible” or have “deficiencies.” A bank that repeatedly fails its living will assessment is essentially being told by its primary supervisor that its business is too risky or too poorly managed to be resolvable. This is a powerful qualitative signal that may not be immediately apparent in the financial statements. Persistent failures can lead to regulatory penalties, including requirements to hold more capital or even forced divestitures of business lines.

Perhaps most importantly, resolution plans fundamentally change the risk equation for investors. The entire framework is built around the principle of a bail-in, not a bailout. In a crisis:

• Shareholders are at the very bottom of the capital structure and will almost certainly be wiped out completely.
• Bondholders (creditors) are next. Their debt is designed to be converted into equity to absorb losses and recapitalize the critical parts of the bank. They take the haircut so that taxpayers don't have to.

This means that when you invest in a large bank's stock or bonds today, you are explicitly accepting the risk that your investment is the financial cushion that will be used in a failure. The days of hoping for a government rescue are over; the “living will” is the legal mechanism ensuring you are the one on the hook.