Bank Insolvency Law Now That It Matters Again

Abstract

Even though the word derives from bank failure, modem banks never technically go bankrupt, no matter how hard it sometimes seems they try. Instead, since well back into the nineteenth century, American banks have been subject to a special regime of bank insolvency that places their failure outside the jurisdiction of bankruptcy courts. In 1976, Robert Clark observed that [t]he theory behind special insolvency proceedings for financial intermediaries appears not to have received careful and sustained attention. His observation remains true today, and legal academics have almost entirely failed even to notice the existence of a special bank insolvency regime.... Few would think that the neglect is still deserved today. Thrift failures, which are now treated in essentially the same way as bank failures, have risen dramatically after 1980.8 The number and size of bank failures have risen too, although with a slightly later start. By 1992, the FDIC, which manages failed banks, and the Resolution Trust Corporation (RTC), which manages failed thrifts, each had institutions totaling hundreds of billions of dollars of assets under their control and subject to the special bank insolvency rules. Congress has responded to these failures by passing four important laws affecting bank insolvency: the Competitive Equality Banking Act of 1987 (CEBA); the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA); the Crime Control Act of 1990; and the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). Congress and the courts have provided the agencies with superpowers in their handling of an institution's estate. That is, the FDIC and RTC gain powers in insolvency that would not have been available to the institution pre-insolvency, or to a non-bank in insolvency-to the disadvantage of third parties. This Article seeks both to describe reasons for the growth of special insolvency rules for banks and to make a normative assessment of the current regime.