Financial Scholars Oppose Eliminating 'Orderly Liquidation Authority' as Crisis-Avoidance Restructuring Backstop
13 Pages Posted: 4 Jun 2017 Last revised: 16 Sep 2017
Date Written: May 23, 2017
This letter, written to the chairs and ranking members of the Senate and House Banking and Judiciary committees, analyzes why substituting the bankruptcy process now proposed for Dodd-Frank’s orderly liquidation authority risks allowing financial firm failure, such as we experienced in 2009, to get out of control, leading to or exacerbating an economic downturn. “Local” fixes can deal with real and perceived problems, such as the potential for a bail-out, in Dodd-Frank’s Orderly Liquidation Authority, without eliminating OLA’s capacity to avoid or diminish the impact of failure during a financial crisis.
The three main reasons for concluding that bankruptcy isn’t a substitute for regulatory OLA are set forth in the letter. First, the bankruptcy process might well not succeed and, hence, needs a regulatory backup. Second, the bankruptcy process itself cannot succeed without a regulatory apparatus that gets financial firms the right capital structure beforehand. Third, a widespread financial crisis that threatens the failure of multiple financial firms will need coordinated responses, particularly coordination with international regulators, that courts cannot, but the financial regulators can, provide.
The letter was co-signed by 120 academics who focus on bankruptcy and/or banking.
Keywords: financial crisis; Dodd-Frank; single-point-of-entry; orderly liquidation authority; chapter 14; FIBA; SIFI
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