Banking Brief: Resolution Strategies for Bankruptcy and Orderly Liquidation Authority

Banking Brief: Resolution Strategies for Bankruptcy and Orderly Liquidation Authority

The Dodd-Frank Wall Street Reform and Consumer Protection Act provides for the effective resolution of large financial institutions, including Title I of the law, which requires systemically important financial institutions (“SIFIs”) to submit plans for their resolution under the Bankruptcy Code, and Title II Orderly Liquidation Authority, which provides for an alternative regime if resolution of a financial institution would otherwise be too disruptive to financial stability. This Banking Brief will discuss different strategies, including single-point-of-entry (“SPOE”) and multiple-point-of-entry (“MPOE”), that can be used under both provisions of the law to facilitate the orderly resolution of financial institutions.

The Single Point of Entry Strategy

SPOE is an effective strategy for resolving larger, more complex institutions, including global systemically important banks with top-tier U.S. parent companies, in an orderly manner. It involves putting the top-tier parent of a U.S. G-SIB into either bankruptcy or Title II receivership, transferring all of its assets including its operating subsidiaries to a newly established bridge financial company, using the parent’s full loss-absorbing resources to recapitalize its former operating subsidiaries as necessary and keep them solvent, open and operating, liquidating the parent in receivership, and distributing the residual value of the bridge financial company to satisfy any and all claims against the parent in accordance with the statutory priority of such claims.

In this way, the SPOE strategy ensures that shareholders and creditors of the parent would absorb losses, as they should; management responsible for the failed condition of the financial group would be removed, as they should be; taxpayers would bear no losses, as they should not; critical operating businesses of the organization would stay open to serve the broader economy, as they must; and the U.S. G-SIB’s failure would not destabilize the U.S. financial system.

Multiple Point of Entry Strategy and Other Strategies

For differently structured, or smaller or less complex institutions, alternative strategies may be more appropriate. For example, institutions with multiple affiliates but no bank holding company might elect an MPOE strategy, where different resolution authorities are applied to different parts of the institution, likely resulting in the break-up of the institution on national or regional bases, along business lines, or both.  However, like under an SPOE strategy, the affiliates remain operational during resolution and afterward. Smaller institutions may pursue a strategy of selling critical subsidiaries to other institutions, or allow the critical subsidiaries to be resolved under existing administrative regimes for banks and broker dealers.

Further Reading

The Clearing House, established in 1853 to bring order to clearing and settlement between banks, is the nation’s oldest banking association and payments company. Past issues of the Banking Brief are available here.