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Orderly liquidation authority as an alternative to bankruptcy

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  • Sabrina Pellerin
  • John R. Walter

Abstract

In response to the financial crisis of 2007, Congress created the Orderly Liquidation Authority (OLA) as part of its overarching financial regulatory reform bill, the Dodd-Frank Act. The OLA's provisions are aimed at simultaneously addressing two conflicting goals---mitigating systemic risk, which is thought to emerge when large financial firms enter the bankruptcy process, while also minimizing moral hazard, which arises when investors believe that firms are likely to be granted a government bailout to save them from bankruptcy and prevent systemic problems. In this article, we review the features of both bankruptcy and the OLA and identify how certain provisions of the OLA aim to address apparent weaknesses inherent in the core features of bankruptcy when resolving systemically important financial institutions, and specifically, how these provisions intend to balance the conflicting goals of limiting systemic risk and the almost inevitable increase in moral hazard.

Suggested Citation

  • Sabrina Pellerin & John R. Walter, 2012. "Orderly liquidation authority as an alternative to bankruptcy," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 98(1Q), pages 1-31.
  • Handle: RePEc:fip:fedreq:y:2012:i:1q:p:1-31:n:v.98no.1
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    References listed on IDEAS

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    1. Bliss, Robert R. & Kaufman, George G., 2006. "Derivatives and systemic risk: Netting, collateral, and closeout," Journal of Financial Stability, Elsevier, vol. 2(1), pages 55-70, April.
    2. Darrell Duffie, 2011. "How Big Banks Fail and What to Do about It," Economics Books, Princeton University Press, edition 1, number 9371.
    3. Thomas H. Jackson, 2012. "Bankruptcy Code Chapter 14 - A Proposal," Book Chapters, in: Kenneth E. Scott & John B. Taylor (ed.), Bankruptcy Not Bailout, chapter 2, Hoover Institution, Stanford University.
    4. Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, vol. 92(4), pages 874-888, September.
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    Cited by:

    1. Allen N. Berger & Charles P. Himmelberg & Raluca A. Roman & Sergey Tsyplakov, 2022. "Bank bailouts, bail‐ins, or no regulatory intervention? A dynamic model and empirical tests of optimal regulation and implications for future crises," Financial Management, Financial Management Association International, vol. 51(4), pages 1031-1090, December.
    2. Kartik B. Athreya & Arantxa Jarque, 2015. "Understanding Living Wills," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 193-223.
    3. Piotr Łasak & Sławomir Wyciślak, 2022. "Dynamics in Complex Systems Amidst Crisis 2008+: Financial Regulatory and Supervisory Reflections," Risks, MDPI, vol. 10(2), pages 1-15, February.
    4. John R. Walter, 2019. "US Bank Capital Regulation: History and Changes Since the Financial Crisis," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 1-40.

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