WASHINGTON BUREAU — The Federal Reserve Board is getting ready to look at whether insolvent financial firms should be resolved through the bankruptcy system, rather than through the current regulatory process.
The Fed is asking for comments about the study, which is required by a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The Fed is asking for comments while gearing up to conduct two studies relating to the question that are required by provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Members of Congress inserted the provisions because of concerns expressed by some economists, accountants and lawmakers about the possibility that the current laws and rules governing the resolution of troubled financial companies place the burden of paying for a major failure on the taxpayer, rather than on lenders, owners and managers.
The Fed is supposed to work with the administrative office of the U.S. federal court system to study whether it might not be more effective to deal with resolving insolvent financial companies through the bankruptcy court system.
The Fed is supposed to look at the possibility of banks using Chapter XI of the U.S. Bankruptcy Code, which permits companies to reorganize, and Chapter VII, which typically leads to the liquidation of the debtor.
The Fed also is supposed to look at whether special financial resolution courts, panels of special masters, or judges, should be used to resolve troubled financial companies.
The Fed and court system administrative office are supposed to discuss whether the Bankruptcy Code should be amended to allow resolution of financial companies without creating the “moral hazard” said to be fostered by the “too big to fail” doctrine that now appears to govern resolution of troubled financial companies.
The Fed and the court system administrative office are also supposed to consult with international regulatory agencies to study issues involving resolution of failures of large, interconnected, multinational financial companies.
Responses to the Fed request will be due 30 days after the notice appears in the Federal Register.