Treasury Recommends Key Changes to Orderly Liquidation Process

The Treasury Department today issued a report recommending important changes to the Dodd-Frank Act’s orderly liquidation authority, which provides a mechanism for the FDIC and Federal Reserve to wind down a systemically important but failing financial institution with minimal harm to the broader financial system. The report focused on creating a new title of the Bankruptcy Code for SIFIs while retaining OLA for truly extraordinary cases.

“With all of the pieces for ensuring orderly resolution of failed institutions now in place, today’s Treasury report is timely and welcome,” commented ABA SVP Jeff Sigmund. “We have always believed that any financial institution — bank or otherwise — should be able to be unwound in an orderly fashion in the event of a failure. The Treasury report also reinforces the view of both Congress and the markets that bankruptcy law should be the first recourse for resolution in the event of failure.” Sigmund added that ABA staff are studying the full Treasury report carefully, including its recommended changes.

While noting that the statutory standard for invoking OLA — involving supermajority votes by the Fed and FDIC boards and a determination by the treasury secretary — is “already exceedingly high,” the report expressed concern that the Dodd-Frank Act still left regulators with too much discretion that “could be misused to bail out creditors and runs the risk of weakening market discipline.”

Specifically, Treasury recommended that a new Chapter 14 bankruptcy code section be created that would combine the “clear, predictable, impartial adjudication of competing claims” that is a strength of the bankruptcy process with “procedural features” tailored to the unique challenges of resolving a SIFI. Meanwhile, Treasury proposed several changes to OLA that would reduce ad hoc disparate treatment of creditors, provide for bankruptcy court claims adjudication, repeal the tax-exempt status of an OLA bridge company, tighten requirements for Treasury financial support for firms in an OLA proceeding and expand judicial review of OLA use, among others.