Large financial institutions in the U.S. and many other countries are now required by the Dodd-Frank Act or similar laws to submit detailed information on their operations, risk management policies (including protocols for responding to a financial crisis) and IT systems to their supervisors.

In the U.S., these institutions must also submit annually to the Federal Deposit Insurance Corp. and Federal Reserve a contingency plan outlining the process for resolving severe distress or failure. This exercise is referred to as the recovery and resolution planning (or "living will") process. While the RRP process is time consuming, costly and cumbersome, it can also be an immensely valuable exercise. This hidden value comes in many forms and varies by institution. Specifically, the RRP process affords institutions with the opportunity to do the following:

Educate the market. Although much of an institution's resolution plan is private, there is a public submission as well. Systemically important financial institutions can use the public portion of their resolution plan as a forum to reassure the market of their strong risk management policies.

Enhance risk management. The RRP process is primarily a risk management exercise. When developing an RRP, SIFIs must identify and test their risk assumptions and controls under a variety of economic scenarios with regulatory oversight and input. If there are deficiencies in a SIFI's risk management practices, the RRP process will bring this shortcoming to light so it can be corrected. 

Educate regulators. An iterative process by nature, involving a series of discussions and meetings between the SIFI and the regulators, the RRP process is an opportunity for SIFIs to educate their regulators about the uniqueness of their institution, including their strengths. Not only does this inform the regulators with respect to the SIFIs resolution plan, but it also lays the foundation for regulatory assistance in future endeavors that a SIFI may wish to pursue.

Frame policy. Resolution planning forces regulators to enter the trenches with SIFIs that have very specific problems. If regulators have a deeper understanding of market wide impediments, regulatory responses and new policies may be more direct and effective.

Streamline legal structure. Over the years there has been a proliferation of legal entities at SIFIs driven by, among other things, acquisitions, tax planning and globalization. Many of these entities no longer serve a purpose and others may be redundant. Maintaining unnecessary legal entities can result in increased costs and complexities. Through the RRP process, SIFIs can leverage the detailed entity-level analysis as a means to identify and eliminate redundant entities and align business operations with existing entities.  

Improve operational efficiencies.  The RRP process requires SIFIs to identify and conduct a detailed analysis of their material entities, critical operations and core business lines – including day-to-day operations, infrastructure required to operate each business line and strategies to resolve such entities and businesses in the event of financial distress. Given the level of specificity and detail required, the RRP process serves as a useful tool for SIFIs to identify operational inefficiencies that can be improved. The diligence and detailed entity-level information collected in a SIFI's resolution plan also can be used to integrate new businesses into existing operations or separate certain businesses or operations even outside a resolution scenario. 

Educate business units. Recovery and resolution planning cannot be done in a vacuum. The RRP process demands a firm-wide effort to produce an integrated, comprehensive and consistent product. While most SIFIs typically assemble a team of project managers to lead the preparation of the resolution plan, a successful resolution plan will require significant contributions and input from many departments and employees across the firm. As a result, a wider range of employees beyond just management will acquire a deeper understanding of the institution's business, restrictions and interconnectedness. A more widely integrated institution that truly understands its strengths and challenges will improve the bottom line. 

Recovery and resolution planning, with all of the associated burden and distractions, is here to stay. Rather than focus on the negative, SIFIs should embrace the process and focus on realizing the potential for hidden value in the RRP process.

Sylvia Mayer is a partner in the business finance and restructuring department at Weil, Gotshal & Manges LLP. Sunny Singh is a business finance and restructuring associate at the firm. Heath Tarbert heads Weil's financial regulatory reform working group and is a partner in the firm's corporate department.