The Dodd Frank Act - Title II: Orderly Liquidation (Part 2 of 2)
In Part 1 of Title 1 - Orderly Liquidation, we provided an overview of the Title I. In this article, we will discuss in detail the important provisions of this title.
Mandatory terms and conditions for all orderly Liquidation actions
In taking action under this title, the Corporation shall—
- determine that such action is necessary for purposes of the financial stability of the United States, and not for the purpose of preserving the covered financial company;
- ensure that the shareholders of a covered financial company do not receive payment until after all other claims and the Fund are fully paid;
- ensure that unsecured creditors bear losses
- ensure that management responsible for the failed condition of the covered financial company is removed (if such management has not already been removed at the time at which the Corporation is appointed receiver);
- ensure that the members of the board of directors (or body performing similar functions) responsible for the failed condition of the covered financial company are removed the Corporation is appointed as receiver; and does not take an equity interest in or become a shareholder of any covered financial company or any covered subsidiary.
The Liquidation process involves determining if the financial entity is cause for systemic failure. If yes, the Corporation takes over. A fund is instituted for liquidation. An interim board is constituted to settle all claims in a specific order. The company can go for appeal against liquidation if it so desires, citing reasons.
The orderly liquidation plan will take into account actions to avoid or mitigate potential adverse effects on low income ,minority, or underserved communities affected by the failure of the covered financial company, and ll provide for coordination with the primary financial regulatory agencies, as appropriate, to ensure that such actions are taken.
A Three-Tiered Funding Mechanism
Allows the FDIC to borrow from Treasury (up to the Maximum Obligation Limitation, which is generally 90 percent of covered financial company assets) to fund the operations of a receivership or bridge financial company.
If receivership assets are not sufficient to repay Treasury borrowings, requires the FDIC to "clawback" funds from creditors who received higher payments than other similarly situated creditors (except when payment was for operations essential to the receivership or bridge financial company).
If the "clawback" is not sufficient to repay Treasury, requires the FDIC to charge risk-based assessments on "eligible financial companies" (BHCs with consolidated assets of $50 billion or more and any nonbank financial company supervised by the FRB) and any nonbank financial company with assets of $50 billion or more.
Mandatory repayment plan
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