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Shadow Banking and Financial Distress: The Treatment of 'Money-Claims' in Bankruptcy

63 Pages Posted: 6 Jan 2013 Last revised: 16 Aug 2014

Chrystin D. Ondersma

Rutgers University School of Law

Date Written: January 4, 2013

Abstract

Despite the panic in the money market in 2008 that required a $3 trillion Treasury guarantee to stave off a full-fledged run on money market funds, Dodd-Frank did not shut down shadow banking, nor did it make shadow banking safe. After Dodd-Frank, distressed financial institutions are subject to a number of conflicting legal regimes, one of which continues to be the Bankruptcy Code. This Article suggests that the Bankruptcy Code in its current form does not adequately account for the unique nature of claims in the money market (or “money-claims”). Investors in the money market are similar to depositors in traditional bank — individuals, corporations, and municipalities store funds that will need to be used in the near term for payroll, municipal services, or other operational needs. In other words, money-market investors make short-term loans for the purpose of cash management rather than investment. Because of this crucial difference between money-claims and ordinary debt obligations, defaults on money-claims are uniquely problematic — corporations may not be able to make payroll or pay suppliers, municipalities may be forced to cut planned services. This Article explains the treatment of money-claims under the current bankruptcy rules, argues that these rules exacerbate the risks associated with money-claims in the shadow-banking sector, and proposes that bankruptcy rules be altered to better reflect the unique nature of money-claims. Specifically, it proposes an abbreviated stay for money-claimants as well as an alternative opportunity for prompt payment of money-claims.

Suggested Citation

Ondersma, Chrystin D., Shadow Banking and Financial Distress: The Treatment of 'Money-Claims' in Bankruptcy (January 4, 2013). Rutgers School of Law-Newark Research Paper No. 148. Available at SSRN: https://ssrn.com/abstract=2196703 or http://dx.doi.org/10.2139/ssrn.2196703

Chrystin D. Ondersma (Contact Author)

Rutgers University School of Law ( email )

180 University Avenue
Newark, NJ 07102
United States

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