While it has been a few years since the financial collapse and government bailout of Lehman Brothers, the energy of the financial backlash has lingered. The previous idea that some banks were too big to fail was challenged, and although some of the nation's largest banks handle trillions of dollars, the understanding that the possibility for bankruptcy exists is still very much on the mind of the public. Regulators have recently determined that 11 of the nation's largest banks must rewrite their living wills and prove they can collapse without causing damage to the economy.

Living Will Bankruptcy Plans

In 2010, the Dodd-Frank Law was passed. This law requires banks to annually submit a living will bankruptcy plan that details their operations and plans for how the bank could be adequately dismantled without any governmental or public support if the bank begins to fail. In this law, the FDIC was given authority to force banks that threatened the financial system to cease business activities.

The banks under fire include the following:

• Bank of America
• Bank of New York Mellon
• JP Morgan Chase
• Morgan Stanley
• Citigroup
• Deutsche Bank
• Barclays
• Credit Suisse
• Goldman Sachs
• State Street
• UBS

Are the plans realistic?

The Federal Reserve and the Federal Deposit Insurance Corporation noted that the submitted plans made unrealistic assumptions, relied heavily on public support, and failed to identify what practices would need to be changed in the place of failure. Credible bankruptcy plans include rational legal structures, production of reliable information, and amending contracts. If both agencies decide that the plans are not credible, there is a legal requirement for the banks to immediately submit a revised report and face penalties.

If the banks do not adjust their living will bankruptcy plans by July 1, 2015, tougher restrictions and forcible shut downs of the banks may result. The concern is that the failure of the banks would necessitate government assistance in order to protect against large-scale economic damages. Restrictions could include capital being set aside to absorb losses, restructure operations, face borrowing limits, and divestment from lines of business.