According to Financial Times News, the Federal Reserve recently published selected portions of resolution plans—commonly called “living wills”—from major banks it supervises. These documents outline how banks would handle an orderly wind-up following catastrophic losses, ideally without requiring bailouts, market disruption, or losses to deposit insurance funds. The analysis reveals significant differences in how banks approach discussing failure, with Goldman Sachs being notably direct about assuming “an extremely large financial loss, followed by ten business days of significant outflows of liquidity,” while others like Morgan Stanley and Bank of America use more euphemistic language like “severe idiosyncratic stress event” and passive constructions about financial health deteriorating. The documents follow a “single point of entry” strategy where holding companies transfer capital to subsidiaries before declaring bankruptcy, though critical quantitative assumptions remain confidential due to commercial sensitivity. This linguistic analysis of crisis communication reveals deeper patterns in institutional risk culture.
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The Psychology of Institutional Self-Reflection
What’s striking about these differences in language isn’t just corporate-speak—it reflects fundamental differences in how institutions confront uncomfortable truths. The psychological difficulty of planning for one’s own demise extends beyond banking to any organization facing existential threats. Companies that can’t speak plainly about worst-case scenarios in internal documents are likely equally reluctant in boardroom discussions. This linguistic hedging suggests deeper cultural issues around risk acknowledgment that could affect decision-making during actual crises. The institutions using diagrams and alliteration (“Crisis Continuum,” “Stages of Stress”) may be attempting to make the unthinkable manageable, but they risk sanitizing the reality of what failure actually means.
Implications for Supervision and Market Confidence
The Federal Reserve’s decade-long struggle to get banks to take these exercises seriously speaks volumes about regulatory challenges. When institutions like Wells Fargo take nearly half their document before addressing “the bad stuff,” it suggests either poor planning or deliberate obfuscation. For investors and regulators, these communication patterns offer clues about which institutions have truly internalized their vulnerability. The direct approach seen in Goldman Sachs’ filing might indicate more robust risk management culture, while the circumlocutory language in Morgan Stanley’s document and passive constructions in Bank of America’s filing could signal institutional reluctance to face harsh realities.
Beyond Individual Institutions: Systemic Risk Considerations
The variation in approach across major players like JPMorgan Chase, Deutsche Bank, and Barclays creates coordination challenges during actual crises. If institutions can’t agree on how to describe failure, can they effectively coordinate during systemic events? The different terminology and conceptual frameworks suggest fragmented understanding of what constitutes crisis across the banking system. This matters because in a true systemic event, communication and coordination between institutions becomes critical—if they’re speaking different languages about fundamental concepts, the entire resolution process becomes more complicated.
What This Means for Stakeholders
For investors and counterparties, these linguistic patterns offer valuable, though subtle, signals about institutional risk culture. The willingness to name losses and failure directly correlates with more realistic risk assessment and potentially better crisis preparedness. Institutions that hedge their language may be hedging their risk management as well. The market should pay attention to which organizations demonstrate clear-eyed assessment of their vulnerabilities versus those that seem to be going through regulatory motions. In the next crisis, the institutions that have practiced speaking plainly about failure may be better equipped to manage it effectively when reality matches their planning assumptions.
