DFA and Orderly Liquidation Authority

The Dodd-Frank Act provided important new authorities to the FDIC to resolve Systemically Important Financial Institutions.

Prior to the recent crisis, the FDIC’s receivership authorities were limited to federally insured banks and thrift institutions. There was no authority to place the holding company or affiliates of an insured institution or any other non-bank financial company into an FDIC receivership to avoid systemic consequences.

The lack of this authority severely constrained the ability of the government to resolve a SIFI.

This authority has now been provided to the FDIC under the Dodd-Frank Act.

n July 2011, the FDIC Board approved a final rule implementing the Title II Orderly Liquidation Authority. This rule making addressed, among other things, the priority of claims and the treatment of similarly situated creditors.

In September 2011, the FDIC Board adopted two rules regarding resolution plans that systemically important financial institutions themselves will be required to prepare – the so-called “living wills.” As per this rule, identified SIFIs submitted their living wills in June 2012 to the authorities.

FDIC’s authorities under the new Liquidation Authority include:

  • repudiating contracts, avoiding preferential or fraudulent transfers, and enforcing any contracts despite provisions (subject to exception for certain types of contracts) that would ordinarily trigger termination, default, acceleration, or other rights to become effective upon insolvency, but subject to valid and perfected security interests
  • transferring the company’s assets and liabilities
  • forming a bridge financial company that can acquire the assets of the company
  • enforcing or disregarding standstill agreements
  • recovering up to two years of compensation paid to directors and senior management substantially responsible for the failure
  • banning senior management from serving at any financial company if they have engaged in serious misconduct
  • appointing itself as a receiver of certain company subsidiaries
  • issuing subpoenas
  • coordinating with foreign financial regulators with respect to any non-US assets or operations of the company

Related Articles