The board of directors of the Federal Deposit Insurance Corp. (FDIC) has approved a proposed rule clarifying how the agency would treat certain creditor claims under the new orderly liquidation authority established under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Title II of the Dodd-Frank Act provides a mechanism for the appointment of the FDIC as receiver for a financial company where the failure of the company and its liquidation under the Bankruptcy Code or other insolvency procedures would pose a significant risk to the financial stability of the U.S.
Among the issues addressed in the notice of proposed rulemaking (NPR) is the availability of additional payments to creditors under the authority of the Dodd-Frank Act. Pursuant to the act, the NPR proposes to bar any additional payments to holders of long-term senior debt, subordinated debt or equity interests that would result in those creditors recovering more than other creditors entitled to the same priority of payments under the law.
The NPR also proposes to clarify that all creditors must expect to absorb losses in any liquidation.
‘Shareholders and unsecured creditors should understand that they, not taxpayers, are at risk,’ says FDIC Chairwoman Sheila Bair. ‘This NPR represents a significant narrowing of the discretion provided under Dodd-Frank for differentiation among creditors, consistent with the law's overarching public-policy objective to maximize market discipline and make clear that all equity and unsecured debt holders are at risk.’
The proposed regulation will be open for public comment for 30 days, and the broader set of questions for the future rulemaking will be open for public comment for 90 days.