This story appeared in Bank Digest.
Although the Government Accountability Office has recommended that the Financial Stability Oversight Council should consider the impact of changing the role of regulators and the treatment of qualified financial contracts in financial company bankruptcies on the stability of the financial system, the FSOC has stated that it would be premature for it to consider proposals to change the Bankruptcy Code.
The financial crisis and the failures of large financial institutions raised questions about the adequacy of the Bankruptcy Code for effectively reorganizing or liquidating these companies without causing further harm to the financial system, according to the GAO. Although the Dodd-Frank Act created the orderly liquidation authority, an alternative resolution process, filing for bankruptcy under the Code remains the preferred resolution mechanism even for systemically important financial companies. However, the Code may not adequately address threats to financial stability, reported the GAO.
Changes could improve the FSOC's ability to address such threats in a timely and effective manner, the GAO said. According to the GAO, the FSOC agreed that a disorderly financial company bankruptcy could pose risks to financial stability, but stated that it would be premature to consider proposals to change the Code until the Dodd-Frank Act is fully implemented or there is evidence of risks that cannot be adequately addressed within existing law. The FSOC also noted that it is facilitating communication and coordination on the implementation of the orderly liquidation authority and living will requirements. The GAO responded that its recommendation was intended to encourage the FSOC to actively address such changes in conjunction with these efforts.