The Bankruptcy Safe Harbor in Light of Government Bailouts: Reifying the Significance of Bankruptcy as a Backstop to Financial Risk
18 NYU J. L. Pub. Pol _ (2015), Forthcoming
American Institute for Economic Research, Working Paper No. 1
Posted: 5 Aug 2015
Date Written: March 1, 2015
If the crisis was a test of the bankruptcy system and its ability to deal with the risks posed by modern finance, then the bankruptcy system failed. Well-designed financial networks have circuit breakers, but the exemption of securitized assets and derivatives trades from the bankruptcy process left bankruptcy law unable to stop runs on financial contracts held by financial institutions. The more effective the bankruptcy law, the greater the ability to build from it to create specialized resolution regimes or to use it to resolve even financial firms, which would increase certainty among creditors and the public. This article emphasizes the importance of effective bankruptcy law as a backstop to systemic risk. The article represents the first part of a two-part study: part two will investigate prerequisites to the development of securities and derivatives markets in emerging economies.
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