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1 1 (August 25, 2017)

handle is hein.crs/govcgup0001 and id is 1 raw text is: FF. ' riE S-' $. h ,i , Orderly Liquidation Authority August 25, 2017 This In Focus provides background information and discusses some of the issues related to the Orderly Liquidation Authority (OLA), an authority Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act; P.L. 111-203) granted to the Federal Deposit Insurance Corporation (FDIC) to resolve large, failing financial institutions under certain circumstances. The Financial CHOICE Act of 2017 (H.R. 10) that passed the House in June 2017 would repeal OLA. Companies in a market economy are generally restrained in their risk-taking by market discipline-potential losses incent firms to carefully manage risk. If risks are not appropriately managed and a firm fails as a result, the judicial bankruptcy process under the Bankruptcy Code can impose losses on stakeholders. However, this process arguably may not always be amenable to smoothly resolving certain financial firms. Liquidating a firm vitally important to financial market segments could disrupt the availability of credit, and the potentially deliberate pace of the bankruptcy process may not be equipped to avoid the runs and contagion characteristic of a financial firm failure. Such disruptions can cause devastating economic outcomes. To address this potential problem at depository institutions, the FDIC has the authority to resolve FDIC-insured, deposit-taking institutions outside of bankruptcy in an administrative resolution regime. Table I. Acronyms BHC Bank Holding Company FDIC Federal Deposit Insurance Corporation OLA Orderly Liquidation Authority TBTF Too Big To Fail Source: CRS. The ability to resolve a financial firm (whether a depository or non-depository) without causing systemic disruption may reduce the likelihood that the government would feel compelled to save the firm with measures such as providing emergency funding. If it is expected that a firm's failure would result in such a response, it is said to be too big to fail (TBTF). The expectation of government support to a TBTF firm exposes taxpayers to losses and causes market distortions, including creating moral hazard-excessive risk taking due to protection from losses-and lower funding costs for TBTF firms relative to competitors. Many observers assert that certain events of the financial cisis were a demonstration of TBTF problems. Certain large institutions had taken on out-sized risks that ultimately caused their failure. In response, the U.S. government took actions to stabilize the financial system, including infusing large amounts of government funds into certain individual institutions. Following the crisis, certain analysts asserted that the FDIC's existing authority was insufficient to contain systemic distress. Many large, complex financial firms are not depositories, and the largest and most complex are generally bank holding companies (BHCs) that own many non-depository subsidiaries. Furthermore, the bankruptcy process under the current Bankruptcy Code does not take systemic stability implications of a firm's failure into consideration. Proponents of this view commonly cite what they assert to be the chaotic aftermath of the Lehman Brothers bankruptcy filing as an illustration of this problem. D wdd -F rt ,k-,k T kk e The Dodd-Frank Act implemented multiple mechanisms to try to eliminate the taxpayer exposures and distorted incentives created by institutions whose failure could destabilize the financial system. One approach was to create the OLA (Title II of the Dodd-Frank Act), a resolution regime designed specifically for certain financial institutions outside of the Bankruptcy Code. OLA is an administrative process in which the FDIC is granted the authority to resolve a financial institution if the Secretary of the Treasury determines (following a recommendation by the Federal Reserve and FDIC) that (1) the institution is in default or likely to default and (2) the default would pose a systemic risk. The institution is granted the opportunity to appeal the determination in court. Although it differs from the FDIC's existing depository resolution authority in certain ways, OLA is sometimes described as extending a similar resolution regime to certain non-depository institutions. OLA can only be used to wind down a firm, and the FDIC must liquidate the company in a manner that mitigates systemic risk and minimizes moral hazard. To accomplish this, the FDIC would take control of the failing institution and have the authority to transfer or sell assets. In addition, the FDIC can set up bridge companies to take ownership of certain assets and assume certain liabilities in order to facilitate the liquidation. The FDIC first uses proceeds it generates through the liquidation to cover costs related to receivership. If those proceeds are insufficient, the FDIC may draw funds from the Orderly Liquidation Fund (OLF) at the Treasury. The OLF is not prefunded, but the FDIC is required to repay the funds used after the fact through assessments on certain large financial institutions. Title II also sets out liquidation rules and claim priorities designed .O 'T gognpo ' -pmm ggmm g , q 's a X 11LULKWALiN,

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