Dodd-Frank gave the Federal Deposit Insurance Corp. authority to take over and oversee the reorganization of so-called systemically important financial institutions whose failure could pose a risk to the economy. However, no one can be sure the FDIC will follow its resolution strategy, which leads many to believe Dodd-Frank will be bypassed in a crisis, according to a Wall Street Journal commentary on Friday. The solution is not to break up the banks or turn them into public utilities. Instead, the commentary says that a step further than Dodd-Frank should be taken: Make big-bank failures feasible without tanking the economy by writing a process to do so into the bankruptcy code through a new amendment — a “chapter 14.” Chapter 14 would impose losses on shareholders and creditors while preventing the collapse of one firm from spreading to others. It could be initiated by the lead regulatory agency and would begin with an over-the-weekend bankruptcy hearing before a pre-selected U.S. district judge. After the hearing, the court would convert the bank’s eligible long-term debt into equity, reorganizing the bankrupt bank’s balance sheet without restructuring its operations.
