What Do Bond Markets Think about \\"Too-Big-to-Fail\\" Since Dodd-Frank?

Gara Afonso and Joao Santos

No 20150701, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: As we discussed in our post on Monday, the Dodd-Frank Act includes provisions to address whether banks remain ?too big to fail.? Title II of the Act creates an orderly liquidation mechanism for the Federal Deposit Insurance Corporation (FDIC) to resolve failed systemically important financial institutions (SIFIs). In December 2013, the FDIC outlined a ?single point of entry? (SPOE) strategy for resolving failing SIFIs that, in principle, should obviate bailouts. Under the SPOE, the FDIC will be appointed receiver of the top-tier parent holding company, and losses of a subsidiary bank will be assigned to shareholders and unsecured creditors of the holding company (in a ?bail-in? arrangement). The company may be restructured by shrinking businesses, breaking it into smaller entities, liquidating assets, or closing operations to ensure that the resulting entities can be resolved in bankruptcy. Crucially, during this process, the healthy subsidiaries of the company, including any banks, will maintain normal operation, thus avoiding the need for bailouts to prevent systemic instability.

Keywords: Financial markets; TBTF; Dodd-Frank Act (search for similar items in EconPapers)
JEL-codes: G1 G2 (search for similar items in EconPapers)
Date: 2015-07-01
New Economics Papers: this item is included in nep-ban
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