The new synthesis of bank regulation and bankruptcy in the Dodd-Frank era

Abstract

Since the enactment of the Dodd-Frank Act in 2010, U.S. bank regulation and bankruptcy have become far more closely intertwined. In this Article, I ask whether the new synthesis of bank regulation and bankruptcy is coherent, and whether it is likely to prove effective.I begin by exploring some of the basic differences between bank resolution, which is a highly administrative process in the U.S., and bankruptcy, which relies more on courts and the parties themselves. I then focus on a series of remarkable new innovations designed to facilitate the rapid recapitalization of systemically important financial institutions: convertible contingent capital securities (“CoCos”); single point of entry resolution under the Dodd-Frank Act; and the quick sale strategy in bankruptcy. I conclude that the early trigger CoCos advocated by Calomiris and Herring and others are the most promising strategy for CoCos, and assess the virtues and potential pitfalls of single point of entry and quick sales. I conclude by considering the general coherence of the new synthesis. The most important frictions lie in the relationship between the Dodd-Frank Act’s resolution provisions and bankruptcy. While their differing treatment of managers could create beneficial incentives to use bankruptcy rather than resolution under the Dodd-Frank rules, the absence of a stay on derivatives in Chapter 11 diminishes the effectiveness of the new synthesis.I argue that the overall objective of the new synthesis should be to funnel large, troubled financial institutions toward bankruptcy wherever possible.