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U.S. corporate and bank insolvency regimes: an economic comparison and evaluation

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  • Robert R. Bliss
  • George G. Kaufman

Abstract

In the U.S., the insolvency resolution of most corporations is governed by the federal bankruptcy code and is administered by special bankruptcy courts. Most large corporate bankruptcies are resolved under Chapter 11 reorganization proceedings. However, commercial bank insolvencies are governed by the Federal Deposit Insurance Act and are administered by the FDIC. These two resolution processes--corporate bankruptcy and bank receiverships--differ in a number of significant ways, including the type of proceeding (judicial versus administrative); the rights of managers, stockholders and creditors in the proceedings; the explicit and implicit goals of the resolution; the prioritization of creditors--claims; the costs of administration; and the timeliness of creditor payments. These differences derive from perceptions that "banks are special." This paper elucidates these differences, explores the effectiveness of the procedural differences in achieving the stated goals, and considers the potential economic consequences of the different structures.

Suggested Citation

  • Robert R. Bliss & George G. Kaufman, 2006. "U.S. corporate and bank insolvency regimes: an economic comparison and evaluation," Working Paper Series WP-06-01, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-06-01
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    File URL: http://www.chicagofed.org/digital_assets/publications/working_papers/2006/wp2006_01.pdf
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    References listed on IDEAS

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    1. George G. Kaufman, 2004. "Depositor Liquidity and Loss Sharing in Bank Failure Resolutions," Contemporary Economic Policy, Western Economic Association International, vol. 22(2), pages 237-249, April.
    2. Robert R. Bliss, 2003. "Bankruptcy law and large complex financial organizations: a primer," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 48-58.
    3. 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.
    4. Walker F. Todd, 1994. "Bank receivership and conservatorship," Economic Commentary, Federal Reserve Bank of Cleveland, issue Oct.
    5. George G. Kaufman, 2004. "FDIC losses in bank failures: has FDICIA made a difference?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 13-25.
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    Cited by:

    1. Beck, Thorsten & Laeven, Luc, 2006. "Resolution of failed banks by deposit insurers : cross-country evidence," Policy Research Working Paper Series 3920, The World Bank.
    2. Laurence Scialom, 2007. "Pour une politique d'actions correctives précoces dans l'Union européenne : les carences institutionnelles et légales," Revue d'Économie Financière, Programme National Persée, vol. 89(3), pages 111-121.
    3. Ignatowski, Magdalena & Korte, Josef, 2014. "Wishful thinking or effective threat? Tightening bank resolution regimes and bank risk-taking," Journal of Financial Stability, Elsevier, vol. 15(C), pages 264-281.
    4. 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.

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    Keywords

    Bank failures ; Federal Deposit Insurance Corporation;

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