Economic Brief

September 2012, No. 12-09

Can Orderly Liquidation Solve the Problems of Bailouts and Bankruptcies?

Betty Joyce Nash, Sabrina R. Pellerin and John R. Walter

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In response to the financial crisis of 2007–09, Congress created the Orderly Liquidation Authority (OLA), a new regime for winding down systemically important financial institutions (SIFIs) that become troubled. The OLA provisions address two conflicting goals: mitigating threats to the financial system associated with bankruptcy and minimizing moral hazard associated with government bailouts. This Economic Brief compares OLA provisions to bankruptcy procedures. Although the OLA process could be quicker and more flexible than bankruptcy, it may not limit systemic risk without increasing moral hazard.

Additional Resources

Cohen, Hollace T., "Orderly Liquidation Authority: A New Insolvency Regime to Address Systemic Risk," University of Richmond Law Review, May 2011, vol. 45, no. 4, pp. 1143–1229.

Jackson, Thomas, "Bankruptcy Code Chapter 14: A Proposal," Hoover Institution Resolution Project, February 28, 2012.

Pellerin, Sabrina R., and John R. Walter, "Orderly Liquidation Authority as an Alternative to Bankruptcy," Federal Reserve Bank of Richmond Economic Quarterly, First Quarter 2012, vol. 98, no. 1, pp. 1–31.

Roe, Mark J., "The Derivatives Market's Payment Priorities as Financial Crisis Accelerator," Stanford Law Review, March 2011, vol. 63, no. 3, pp. 539–590.

Testimony of Harvey R. Miller at hearings on "Too Big to Fail: The Role for Bankruptcy and Antitrust Law in Financial Regulation Reform," Subcommittee on Commercial and Administrative Law, House of Representatives Committee on the Judiciary, October 22, 2009.

White, Michelle J., "Corporate Bankruptcy," in the New Palgrave Dictionary of Economics and the Law, P. Newman, ed., Macmillan Press, 1998.