This story appeared in Bank Digest.
The Federal Deposit Insurance Corp. has announced the approval of an interim final rule defining how the agency will treat some creditors' claims under the orderly liquidation authority covering large financial companies. Under the Dodd-Frank Act, the FDIC can be appointed the receiver for a large, failing financial company if the failure of the company and its liquidation under the Bankruptcy Code or other insolvency procedures would pose a significant risk to U.S. financial stability. The interim rule is little changed from the proposed rule published Oct. 19, 2010, the agency said.
The interim rule does not change the proposed rule's treatment of the possibility of additional payments to creditors, the agency said. Additional payments are payments in excess of what would result from a creditor's priority, which might be made to keep a failing firm in operation during liquidation. Creditors that are ineligible for any additional payments include holders of unsecured senior debt with a term of more than 360 days, holders of subordinated debt and shareholders. Short-term debt holders are “highly unlikely” to receive additional payments, either, the FDIC said, and will almost always receive the same pro-rata share of a claim that a long-term debt holder would receive.
Additional payments can only be made based on a vote by the FDIC Board of Directors and are subject to recoupment if ultimate recoveries are insufficient to repay any temporary government liquidity support, the agency said. The FDIC stressed that no taxpayer money will be used to cover losses from the failure of a large firm.