06/17/2010 06:36 am ET Updated May 25, 2011

Why Living Wills Fail

A central idea in the financial regulations undergoing final negotiation in the United States -- and in similar initiatives in Europe -- is that large banks must draw up "living wills" that should explain, in considerable detail, how they will be wound down in the event of future failure.

In theory, the concept is appealing. No one knows their business better than the banks themselves, the reasoning goes, so they should have responsibility for explaining how they can close down their various operations -- or perhaps sell more valuable parts while limiting losses for unprofitable activities. This is often presented as "smart regulation," with government regulators requiring private-sector experts to do the difficult technical work.

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