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Treasury Releases Recommendations on Orderly Liquidation Authority

February 22, 2018 / Source: Bank News

February 21 — The U.S. Department of the Treasury has released a report detailing its review and recommendations on the Orderly Liquidation Authority. The report responds to the presidential memorandum directing Treasury to provide recommendations to align OLA with the Core Principles for Financial Regulation and determine whether the Bankruptcy Code should be reformed to better enable resolution of financial companies. The recommendations made are designed to ensure that taxpayers are protected by strengthening the bankruptcy procedure for a failed financial company and retaing OLA in very limited circumstances with significant reforms.

A new Chapter 14 of the Bankruptcy Code is recommended for distressed financial companies with significant reforms to make bankruptcy a more effective option for financial institutions. The revised Chapter 14 would preserve the key advantage of the existing framework — clear, predictable, impartial adjudication of competing claims — while adding procedural features tailored to the challenges posed by large, interconnected financial companies. These changes are suggested with the intention of making the use of OLA an even more remote possibility.

“Treasury recommendations seek to ensure that our financial system is resilient while protecting taxpayers and promoting market discipline,” said Treasury Secretary Steven T. Mnuchin. “The bankruptcy reforms that we propose will make the shareholders, management and creditors of a financial company bear any losses from its failure. The policy of this Administration is clear: we will not tolerate taxpayer-funded bailouts.”

A further recommendation would retain OLA as an emergency tool for use under extraordinary circumstances. Proposed reforms to the OLA process would seek to eliminate opportunities for ad hoc disparate treatment of similarly situated creditors, reinforce existing taxpayer protections and strengthen judicial review.

The following recommendations are included in the report, which can be read in full here:

Eliminating the FDIC’s authority to treat similarly situated creditors differently on an ad hoc basis
Repeal of the tax-exempt status of the bridge company
Regarding the use of the Orderly Liquidation Fund, to the extent possible, guarantees of private sector lending would be used as opposed to direct loans, and premium rates of interest of guarantee fees, as applicable, would be charged to encourage a prompt return to reliance on private-sector credit markets
Backstop assessment imposition as soon as reasonably possible if an OLF loan is not repaid
Reforms to the judicial review provisions related to use of the OLA to provide additional assurance that the government’s decision to appoint the FDIC as receiver of a financial company is the product of reasoned and well-supported analysis