Title II Overview: Orderly Liquidation Authority

American Bankers Association Contacts

Denyette DePierro (202) 663-5333

Dechert LLP Authors

Thomas P. Vartanian (202) 261-3439
Robert H. Ledig (202) 261-3454
David L. Ansell (202) 261-3433


Summary

This Title is intended to ensure that Federal authorities will have the ability to address financial distress at companies that could have a significant impact on U.S. financial stability.  This approach  responds to concerns that Federal authorities were hampered in dealing effectively with large non-bank institutions during the 2008 financial crisis because they lacked the type of authority that the Federal banking agencies, including the FDIC, are able to bring to play when a large depository institution is in a seriously troubled condition.

Under the Act, Federal authorities will be able to place both Large BHCs and Significant Nonbanks in receivership under Federal control.  The receivership would be charged with liquidating the institution.  It would operate under principles largely drawn from the receivership provisions of the FDI Act that govern receiverships of insured depository institutions.

While this approach will provide significant new tools for Federal regulators to deal with threats to U.S. financial stability, it will create significant uncertainties for companies, that because of their size or interconnections with other major financial services firms, could potentially become the subject of a Federal receivership action.  These companies and their equity holders, creditors, borrowers, customers, vendors and counterparties will have no assurance in advance as to whether financial distress at the company will be dealt with in a Chapter 11 reorganization or a Chapter 7 liquidation under the Bankruptcy Code, or a Federal receivership under Title II.

These alternative approaches are triggered by different conditions at the distressed company.  They are designed to achieve different objectives.  Furthermore, they provide different types of opportunities to participate in the resolution process and offer different rights to the various categories of constituents.  This is likely to generate a fundamental reevaluation of how significant BHCs and non-BHCs and their constituents consider positioning themselves in relation to the possibility that a company could find itself in financial distress and either be placed in bankruptcy or Federal receivership.

If a Federal receivership is triggered, there will be significant attention on how it is handled.  The controversy regarding the concept of "too big to fail" will place a high level of focus on how various constituents of the institution in receivership are treated and whether the resolution amounts to a "bail out" of certain parties.

The following links provide expanded analysis within this section: