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Why Dodd-Frank’s Orderly Liquidation Authority Should be Preserved

Tuesday, February 28, 2017 10:36
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(Before It's News)

Ben Bernanke:

"http://feeds.feedburner.com//https://www.brookings.edu/blog/ben-bernanke/2017/02/28/why-dodd-franks-orderly-liquidation-authority-should-be-preserved/"
target="_blank">Why Dodd-Frank’s orderly liquidation authority
should be preserved
: The collapse of the investment bank Lehman
Brothers in September 2008 was perhaps the defining event of the
financial crisis. Lehman’s bankruptcy, followed by the
near-collapse (save for government intervention) of the insurance
company AIG, greatly intensified the fear and panic in markets,
bringing the financial system and the economy to the brink of the
abyss.

These events, including the government’s response,
remain controversial. What should not be controversial is that
ordinary bankruptcy procedures were entirely inadequate for the
situation. The bankruptcy judge in the Lehman case—required, by
law, to focus narrowly on adjudicating creditors’ claims against
the company—had neither the tools nor the mandate to try to
mitigate the effects of the failure on the financial system or the
economy. The Fed, FDIC, and Treasury used the powers available to
them, often in ad hoc ways, to try to preserve broader stability.
But these agencies likewise lacked a framework for dealing
systematically with failing financial giants.

The architects of the Dodd-Frank Act, which reformed
financial regulation after the crisis, recognized that—in order to
make the financial system safer and eliminate future
taxpayer-funded bailouts—a better approach was needed. The first
two sections, or titles, of the bill aimed to do just that. Title I
extended the ordinary bankruptcy framework to better accommodate
the complexities of large, interconnected financial firms. It also
required large bank holding companies to submit to their regulators
plans for how they could be successfully resolved in a crisis
(“living wills”). …

Jumping ahead to the conclusion:

Conclusion Recent experience has
taught us that the uncontrolled collapse of a systemically
important financial firm can do enormous damage to the broader
financial system and the economy. The Dodd-Frank Act modified
bankruptcy law to better accommodate large, complex financial
firms, but also wisely provided a  backstop framework—the
Orderly Liquidation Authority of Title II—that can be invoked when
overall financial stability is at stake. Critically, the OLA draws
on the expertise and planning of the FDIC and the Fed. The OLA is
not a bailout mechanism, since all losses are borne by the private
sector. The government can provide temporary liquidity under OLA
(as it probably would have to do under Title I, as well), but not
permanent capital. Taxpayers are fully protected.

To be sure, controversies remain over how effective in
even a Title II resolution would be in the context of a significant
financial crisis. Still, drawing in particular on the FDIC’s
decades of experience in dealing with failing banks, "nofollow" href=
"http://feeds.feedburner.com//https://www.fdic.gov/news/news/speeches/spmay1215.html"
target="_blank">a good bit of progress has been made
. The tools
provided by Title II are a significant advance over what was
available during the recent crisis.

Have we ended bailouts? Current lawmakers can’t bind
future legislators, and we can’t guarantee that a future
administration and Congress, fearful of the economic consequences
of a building financial crisis, won’t authorize a financial
bailout. But the best way to reduce the odds of that happening is
to have in place a set of procedures to deal with failing financial
firms that those responsible for preserving financial stability
expect to be effective. That’s what the OLA is intended to
provide.

"http://feeds.feedburner.com/~r/EconomistsView/~4/L3hTrk1RMIM"
height="1" width="1" alt="" />



Source: http://economistsview.typepad.com/economistsview/2017/02/why-dodd-franks-orderly-liquidation-authority-should-be-preserved.html

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