A new chapter in the bankruptcy code for distressed financial companies would be a “more effective option” than existing requirements for “orderly liquidation authority (OLA),” the Treasury Department recommended Wednesday.
In a report to President Donald Trump, Treasury Secretary Steven T. Mnuchin said amending the bankruptcy code would make “the shareholders, management, and creditors of a financial company bear any losses from its failure.” He added that it is the policy of the administration that “we will not tolerate taxpayer-funded bailouts.”
According to Treasury, changes to federal bankruptcy laws (under Chapter 14) would “preserve the key advantage of the existing bankruptcy process—clear, predictable, impartial adjudication of competing claims—while adding procedural features tailored to the unique challenges posed by large, interconnected financial companies.”
Treasury said the “enhancements to the Bankruptcy Code” would make the likelihood of having to use OLA even more remote.
In a release, the agency said the report to Trump responds to the president’s memorandum of last year directing Treasury to align the OLA process with the “Core Principles for Financial Regulation,” released by the Treasury last year. The “four principles” envision a reform of the federal financial institution regulatory framework.
However, the report also recommends “significant reforms” to the OLA process (as it calls for retaining OLA as an emergency tool for use under extraordinary circumstances). The recommended reforms, Treasury said, include:
- Elimination of 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.
- Guarantees of private sector lending be used as opposed to direct loans from the Orderly Liquidation Fund (OLF), and that premium rates of interest or guarantee fees, as applicable, “be charged to encourage a prompt return to reliance on private-sector credit markets.”
- Imposition of the backstop assessment as soon as reasonably possible if an OLF loan is not repaid.
- Reform of 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.