Bondholder Reorganization of Systemically Important Financial Institutions

11 Pages Posted: 4 Oct 2017

See all articles by Steven Gjerstad

Steven Gjerstad

University of Arizona - Department of Economics

Date Written: June 25, 2017

Abstract

This paper describes a resolution process for faltering financial firms that quickly allocates losses to bondholders and transfers ownership of the firm to them. This process overcomes the most serious flaws in resolution plans submitted by banks under Dodd-Frank Title I and in the FDIC receivership procedure in Dodd-Frank Title II by restoring the balance sheet of a failing financial institution and immediately replacing the management and board of directors who allowed its demise. In almost all bank failures, this process would eliminate the need for government involvement beyond court certification of the reorganization. The procedure overcomes the serious incentive distortions and inefficiencies that result from bailouts, and avoids the destruction of value and financial market turmoil that would result from the bankruptcies and liquidations that Dodd-Frank requires for distressed and failing banks.

Keywords: Bank reorganization, Resolution, Dodd-Frank

JEL Classification: G01, G21, G28

Suggested Citation

Gjerstad, Steven, Bondholder Reorganization of Systemically Important Financial Institutions (June 25, 2017). Paper presented at conference on Systemic Risk and the Organization of the Financial System, Chapman University, May 13, 2017, Available at SSRN: https://ssrn.com/abstract=3047529 or http://dx.doi.org/10.2139/ssrn.3047529

Steven Gjerstad (Contact Author)

University of Arizona - Department of Economics ( email )

McClelland Hall
Tucson, AZ 85721-0108
United States

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