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Friday, March 20, 2015

GAO Evaluates Bankruptcy Code for Financial Institutions

The U.S. Bankruptcy Code chapters dealing with the liquidation or reorganization of a financial company have not been changed since GAO last reported on financial company bankruptcies in July 2013, the GAO reported in its assessment of financial company bankruptcies. However, several bills introduced in the previous Congress would, if reintroduced, make broad changes to the Code, relative to financial company bankruptcies.

The Financial Institution Bankruptcy Act of 2014 (H.R. 5421) and Taxpayer Protection and Responsible Resolution Act (S.1861) would have expanded the powers of the Federal Reserve and the FDIC and would have imposed a temporary stay on financial derivatives that are exempt from the automatic stay under the Code. That stay would prohibit a creditor from seizing or taking other action to collect what the creditor is owed under the financial derivative. Furthermore, the bills would have added processes for the resolution for large, complex financial institutions, similar to provisions currently in the Orderly Liquidation Authority in the Dodd-Frank Act, which grants FDIC the authority to resolve failed systemically important financial institutions under its receivership.

The 21st Century Glass-Steagall Act of 2013 — a bill introduced in the House of Representatives (H.R. 3711) and the Senate (S. 1282) — would have repealed safe-harbor provisions that allow most counterparties in a qualifying transaction with the debtor to exercise certain contractual rights even if doing so would otherwise violate the automatic stay.

As of March 12, 2015, these legislative proposals had not been re-introduced in Congress.

The Dodd-Frank Act mandates that the GAO report on ways to make the U.S. Bankruptcy Code more effective in resolving certain failed financial companies. This report addresses recent changes to the U.S. Bankruptcy Code and efforts to improve cross-border coordination to facilitate the liquidation or reorganization of failed large financial companies under bankruptcy.

Read the report.

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