John Armour, Dan Awrey, Paul Davies, Luca Enriques, Jeffrey N. Gordon, Colin Mayer, and Jennifer Payne
- Published in print:
- 2016
- Published Online:
- October 2016
- ISBN:
- 9780198786474
- eISBN:
- 9780191828782
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780198786474.003.0016
- Subject:
- Law, Constitutional and Administrative Law, Company and Commercial Law
An ideal bank resolution procedure achieves the objective of minimizing the negative externalities of bank failure but allocates the costs of so doing primarily to the bank’s shareholders and ...
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An ideal bank resolution procedure achieves the objective of minimizing the negative externalities of bank failure but allocates the costs of so doing primarily to the bank’s shareholders and bondholders and only thereafter, if at all, to the taxpayer. Two principal resolution mechanisms are discussed in this chapter: one involves the rapid transfer to a solvent acquirer of the bank’s insured deposits and possibly other viable businesses of the bank, with the liquidation of the rump of the bank which is not transferred. The second procedure, generally referred to as ‘bail-in’, consists of reorganizing the failing bank so that it emerges as a restored, viable entity, without either being put into standard bankruptcy or a transferee being found for its viable businesses. This can be achieved through voluntary agreement among the banks’ creditors and shareholders, but a statutory procedure will impose it in the absence of agreement (thus, perhaps, providing an incentive to voluntary agreement). The central element in such a procedure is that losses are inflicted, by regulatory decision, on long-term creditors, as in a bankruptcy, but without the company being put into bankruptcy.Less
An ideal bank resolution procedure achieves the objective of minimizing the negative externalities of bank failure but allocates the costs of so doing primarily to the bank’s shareholders and bondholders and only thereafter, if at all, to the taxpayer. Two principal resolution mechanisms are discussed in this chapter: one involves the rapid transfer to a solvent acquirer of the bank’s insured deposits and possibly other viable businesses of the bank, with the liquidation of the rump of the bank which is not transferred. The second procedure, generally referred to as ‘bail-in’, consists of reorganizing the failing bank so that it emerges as a restored, viable entity, without either being put into standard bankruptcy or a transferee being found for its viable businesses. This can be achieved through voluntary agreement among the banks’ creditors and shareholders, but a statutory procedure will impose it in the absence of agreement (thus, perhaps, providing an incentive to voluntary agreement). The central element in such a procedure is that losses are inflicted, by regulatory decision, on long-term creditors, as in a bankruptcy, but without the company being put into bankruptcy.
Hal S. Scott
- Published in print:
- 2016
- Published Online:
- January 2017
- ISBN:
- 9780262034371
- eISBN:
- 9780262332156
- Item type:
- chapter
- Publisher:
- The MIT Press
- DOI:
- 10.7551/mitpress/9780262034371.003.0017
- Subject:
- Economics and Finance, Economic History
The orderly liquidation authority (OLA) contained in Title II of the Dodd–Frank Act, created a new regime for receivership of nonbank financial companies whose failures “would have serious adverse ...
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The orderly liquidation authority (OLA) contained in Title II of the Dodd–Frank Act, created a new regime for receivership of nonbank financial companies whose failures “would have serious adverse effects on the financial stability in the United States.” As such, OLA is intended to offer regulators an alternative to bankruptcy proceedings. Once the company is under OLA, the Federal Deposit Insurance Corporation (FDIC) has broad authority to resolve the insolvent firm. The FDIC, in conjunction with the Bank of England, has stated its preference for a “single-point-of-entry” (SPOE) approach to resolving failed financial companies. Under this approach the FDIC would be appointed as receiver to the top-tier parent of the failed holding company. This chapter discusses the general design of the OLA and the SPOE strategy; total loss absorption capacity (TLAC) to assure holding company recapitalization; recapitalization of operating subsidiaries; safe harbor for derivatives counterparties facing a failing institution; cross-border cooperation of regulators in the use of the SPOE approach.Less
The orderly liquidation authority (OLA) contained in Title II of the Dodd–Frank Act, created a new regime for receivership of nonbank financial companies whose failures “would have serious adverse effects on the financial stability in the United States.” As such, OLA is intended to offer regulators an alternative to bankruptcy proceedings. Once the company is under OLA, the Federal Deposit Insurance Corporation (FDIC) has broad authority to resolve the insolvent firm. The FDIC, in conjunction with the Bank of England, has stated its preference for a “single-point-of-entry” (SPOE) approach to resolving failed financial companies. Under this approach the FDIC would be appointed as receiver to the top-tier parent of the failed holding company. This chapter discusses the general design of the OLA and the SPOE strategy; total loss absorption capacity (TLAC) to assure holding company recapitalization; recapitalization of operating subsidiaries; safe harbor for derivatives counterparties facing a failing institution; cross-border cooperation of regulators in the use of the SPOE approach.
