Bliss, Robert R.; Kaufman, George G. --- "Resolving Large Complex Financial Institutions Within and Across Jurisdictions" [2011] ELECD 501; in LaBrosse, Raymond John; Olivares-Caminal, Rodrigo; Singh, Dalvinder (eds), "Managing Risk in the Financial System" (Edward Elgar Publishing, 2011)

Book Title: Managing Risk in the Financial System

Editor(s): LaBrosse, Raymond John; Olivares-Caminal, Rodrigo; Singh, Dalvinder

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9780857933812

Section: Chapter 16

Section Title: Resolving Large Complex Financial Institutions Within and Across Jurisdictions

Author(s): Bliss, Robert R.; Kaufman, George G.

Number of pages: 37

Extract:

16. Resolving large complex financial
institutions within and across
jurisdictions1
Robert R. Bliss and George G. Kaufman

16.1. INTRODUCTION

The ultimate objective of resolving insolvent firms is to treat stakeholders
fairly, according to their legal contract, and to minimize the loss of value
of the firm or its assets in order to maximize the value to the stakeholders.
But disagreement exists on how this objective may be achieved efficiently
and how one may identify the relevant stakeholders, including the general
public. As a result, insolvency or bankruptcy resolution regimes for firms
differ across jurisdictions both within and across national boundaries, as
well as across industries ­ as in some countries such as the US. In particu-
lar, disagreements revolve around the existence, importance and nature
of any externalities that spill over from the failure and resolution of the
insolvent firm to the welfare of the economy as a whole.
To understand how best to deal with distressed large complex financial
institutions (LCFIs), which include large complex banks, we review salient
aspects of the current bank resolution and general corporate bankruptcy
procedures in the US, considering the institutional incentives in both
cases.2 We need to understand the similarities and differences in these
benchmark processes before examining the problems that arise when
LCFIs become seriously distressed.
We next discuss the reasons that a special new insolvency regime may
be warranted by noting the similarities and differences between smaller
banks and LCFIs.3 We then offer our own set of objectives. Our ...