Table of Contents

Managing Risk in the Financial System

Managing Risk in the Financial System

Edited by John Raymond LaBrosse, Rodrigo Olivares-Caminal and Dalvinder Singh

Managing Risk in the Financial System makes important and timely contributions to our knowledge and understanding of banking law, financial institution restructuring and related considerations, through the production of an innovative, international and interdisciplinary set of contributions which link together the law and policy issues surrounding systemic risk and crisis management.

Chapter 16: Resolving Large Complex Financial Institutions Within and Across Jurisdictions

Robert R. Bliss and George G. Kaufman

Subjects: economics and finance, financial economics and regulation, money and banking, law - academic, finance and banking law


1 Robert R. Bliss and George G. Kaufman 16.1. INTRODUCTION The ultimate objective of resolving insolvent firms is to treat stakeholders fairly, according to their legal contract, and to minimize the loss of value of the firm or its assets in order to maximize the value to the stakeholders. But disagreement exists on how this objective may be achieved efficiently and how one may identify the relevant stakeholders, including the general public. As a result, insolvency or bankruptcy resolution regimes for firms differ across jurisdictions both within and across national boundaries, as well as across industries – as in some countries such as the US. In particular, disagreements revolve around the existence, importance and nature of any externalities that spill over from the failure and resolution of the insolvent firm to the welfare of the economy as a whole. To understand how best to deal with distressed large complex financial institutions (LCFIs), which include large complex banks, we review salient aspects of the current bank resolution and general corporate bankruptcy procedures in the US, considering the institutional incentives in both cases.2 We need to understand the similarities and differences in these benchmark processes before examining the problems that arise when LCFIs become seriously distressed. We next discuss the reasons that a special new insolvency regime may be warranted by noting the similarities and differences between smaller banks and LCFIs.3 We then offer our own set of objectives. Our analysis concludes that a modified, or hybrid, bankruptcy reorganization is preferable to both...

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