Abstract
The term “too big to fail” became ubiquitous following the 2007-2008 Global Financial Crisis. Lawmakers, regulators, and scholars wondered if there was a better way forward than issuing an array of ad hoc bailout packages to large financial institutions. Congress, in enacting the Dodd-Frank Act, sought to address the concern by creating a new regulatory framework to resolve large financial institutions in an orderly manner.
First, Congress required too-big-to-fail institutions to file “living wills,” essentially planning documents that describe the institution’s path to a safe failure under the Bankruptcy Code—a failure that would not impact system-wide financial stability. Second, Congress gave “orderly liquidation authority” to the FDIC, allowing the agency to take over a too-big-to-fail institution with emergency funding if necessary. Over the past fifteen years, large financial institutions, their lawyers, and regulators have spent countless hours navigating these two hefty provisions of the Dodd-Frank Act in order to prepare for the next crisis-like event. Yet, during the March 2023 panic that started with a run on Silicon Valley Bank, nobody seemed to bother with either living wills or orderly resolution.
Why not? Leveraging financial history and economic theory, this Article illustrates the substantive and procedural flaws of the Dodd-Frank resolution regime. First, it does not offer system-wide assurance during a system-wide panic. It was designed to deal with the idiosyncratic risk associated with a single institution’s distress, not the systemic risk associated with crises. Second, to the extent that regulators wish to mitigate idiosyncratic risk, they are too hesitant to use the resolution regime when uncertainty is high during a panic, further eroding the regime’s credibility. If Congress wishes to save this resolution regime, lawmakers should consider expanding its coverage to include almost-too-big-to-fail institutions so that agencies can begin to build expertise and credibility.
Disciplines
Banking and Finance Law | Law and Economics
Date of this Version
9-8-2025
Working Paper Citation
Zhang, Jeffery Y., "Too Scared to Use: Living Wills and Orderly Liquidation of Too-Big-to-Fail Financial Institutions" (2025). Law & Economics Working Papers. 303.
https://repository.law.umich.edu/law_econ_current/303