Do Resolution Plans Have Any Resolve?

These "living wills" are the financial equivalent of planning your own funeral: necessary, a bit morbid, and ultimately executed by someone else who will do what they want anyway.

The Theory: Planning for Financial Afterlife

For those who haven't had the pleasure of crafting one, resolution plans are essentially those massive, regulatory-mandated playbooks where banks map out their own demise. "In case of emergency, break glass" instructions that supposedly guide an orderly wind-down when things go catastrophically wrong. After 2008's financial carnage, Dodd-Frank Section 165(d) made these mandatory for big banks, with the FDIC also requiring IDI Plans focused specifically on the insured entity.

Why Regulators Are All-In on the Concept

• Structural Transparency: Big banks can be absolute labyrinths of subsidiaries. Resolution plans force them to map out the corporate tangle that would make even Theseus get lost

• Orderly Wind-Down: The hope is that you can sell off business lines without setting the financial system on fire

• Continuity of Key Functions: Keep payments, settlements, and other "essential services" running while the rest of the bank gets dismantled

• Regulatory Cheat Sheet: Give the FDIC, Fed, or foreign regulators a blueprint so they don't have to play financial detective mid-crisis

• "Too Big to Fail" No More: The Holy Grail, convincing the world that even mega-banks can die in a tidy manner without taxpayer resuscitation (HA!)

If you've been in any of the excruciating assumption workshops where these plans get hammered out, you know they involve months of work, armies of consultants, and enough PowerPoint slides to wallpaper the Empire State Building. Some of these documents are so thick they could stop bullets, which might be their most practical use.

The Reality: When Plans Meet Panic

Here's where I'm going to spill some tea: when actual bank failures happen, these meticulously crafted plans often end up about as useful as a chocolate teapot.

Let us count the ways resolution plans miss the mark:

Speed Kills

Today's bank runs happen at TikTok speed, not regulatory speed. By the time someone finds and dusts off the "living will" binder, $42+ billion in deposits may have already sprinted for the exits (looking at you, SVB). No resolution plan survives the first contact with the panic button on a banking app.

Regulators Go Rogue

When systemic risk looms, regulators tend to throw the rulebook out the window. The Bank Term Funding Program (BTFP)? The systemic risk exceptions guaranteeing uninsured deposits? The shotgun marriages between failing and acquiring institutions? None of these were in the resolution plans of those firms, but they were the actual plot of our recent banking dramas

Hot air on the air

Resolution plans exist in a theoretical vacuum that rival an undergrad econ lecture hall, where decisions are made by rational players purely on financial merit. Meanwhile, in the real world, politicians, influencers, and CNBC talking heads create a hurricane of hot takes that blow carefully laid plans to smithereens.

Panic at the Francisco (bank)

Banks are operated by individuals capable of rational thought and panic herd mentality. The second markets get a whiff of trouble, individuals don't calmly consult the resolution plan, they run for the hills. Have you ever seen a CFO referencing Section 4.7.2 of the Resolution Plan during a crisis? Me neither.

Why Bother? The Silver Lining

If resolution plans so often get tossed aside during actual crises, why do we keep churning them out? Because the real value is in the process, what you learn about your bank, hidden risks with surprising impact potential.

Own-Goal Prevention

Mapping out your potential downfall forces you to confront all those random subsidiaries, legacy systems, and operational vulnerabilities you conveniently ignore in normal times. "Wait, we own a subsidiary in the Cayman Islands that holds what assets?" "You mean our critical payment systems rely on that legacy platform managed by three people nearing retirement?" These are the epiphanies that actually make banks safer.

Regulatory & Public Relations Theater

Let's not ignore the big compliance machine. Regulators need proof banks are "prepared," consultants get to bill enough hours to buy vacation homes, and banks get to say, "We have a plan!" even if it's more or less a security blanket with a fancy cover page

Resolution Planning Needs a Reboot

After a decade-plus of creating these massive documents, it's time to admit they're the financial equivalent of a fire evacuation plan that assumes everyone will calmly walk, not run, to the nearest exit.

What would make resolution planning useful?

1. Real-Time Adaptability: Resolution plans should be living, breathing game plans that adapt to changing conditions, not static documents that get updated annually. Make them interactive "apps," not doorstop documents

2. Digital Decision Trees: Imagine an interactive tool that lets regulators game out different failure scenarios in real time. Flip open your laptop and simulate what happens if deposits flee or capital markets freeze

3. Market Psychology Modeling: Plans should account for how markets and depositors actually behave during stress, not how regulators wish they would behave. Factor in the panic effect of social media and the speed of rumor-driven withdrawals

4. Focus on Prevention, Not Autopsy: The best resolution is one that never needs to happen. Plans should emphasize risk monitoring and early intervention measures that prevent full-blown failures. The findings from the resolution planning process complete the cycle back to the beginning, risk identification.

We all know how things would play out if one of the banks that are required to resolution plan actually failed, though; recent history has shown us that the regulators have their own three-step resolution plan:

1. Initiate Systemic Risk Exemption for any bank failing that might even remotely cause contagion risk toward the banks that REALLY can't afford to fail

2. Workshop 4-letter acronyms for the Discount Window workaround to make sure banks shore up liquidity before it's too late

3. Sell off assets from failed banks "using the least costly resolution option and minimizing losses to the Deposit Insurance Fund" (but really just charge the DIF a special assessment to make up the difference)