The U.S. Department of the Treasury, in its review of the Orderly Liquidation Authority (OLA), recommended retaining OLA, but under limited circumstances with significant reforms.
OLA was established through the Dodd-Frank Act to provide a process to quickly and efficiently liquidate a large financial company that is close to failing. It is aimed at protecting the financial stability of the economy, forcing shareholders and creditors to bear the losses of the failed financial company and removing management that was responsible for the condition of the company.
The Treasury says reforms are needed to make bankruptcy a more effective option for financial companies.
Among its recommendations, the Treasury advocates for a new Chapter 14 of the bankruptcy code for distressed financial companies. The reforms would preserve the key advantage of the existing bankruptcy process while adding features that meet the challenges posed by large financial companies.
The Treasury believes these changes to the bankruptcy code would make the likelihood of ever using OLA more remote.
“Treasury recommendations seek to ensure that our financial system is resilient while protecting taxpayers and promoting market discipline,” Treasury Secretary Steven Mnuchin said. “The bankruptcy reforms that we propose will make the shareholders, management, and creditors of a financial company bear any losses from its failure. The policy of this Administration is clear: we will not tolerate taxpayer-funded bailouts.”
The report was created in response to the Presidential Memorandum directing Treasury to propose recommendations to align OLA with the Core Principles for Financial Regulation and determine whether the Bankruptcy Code should be reformed to better enable resolution of financial companies.