Insolvency of Systemically Significant Financial Companies: Bankruptcy vs. Conservatorship/Receivership

David H. Carpenter
Legislative Attorney


One clear lesson of the 2008 recession, which brought Goliaths such as Bear Sterns, CitiGroup, AIG, and Washington Mutual to their knees, is that no financial institution, regardless of its size, complexity, or diversification, is invincible. Congress, as a result, is left with the question of how best to handle the failure of systemically significant financial companies (SSFCs). In the United States, the insolvencies of depository institutions (i.e., banks and thrifts with deposits insured by the Federal Deposit Insurance Corporation (FDIC)) are not handled according to the procedures of the U.S. Bankruptcy Code. Instead, they and their subsidiaries are subject to a separate regime prescribed in federal law, called a conservatorship or receivership. Under this regime, the conservator or receiver, which generally is the FDIC, is provided substantial authority to deal with virtually every aspect of the insolvency. However, the failure of most other financial institutions within bank, thrift, and financial holding company umbrellas (including the holding companies themselves) generally are dealt with under the Bankruptcy Code. 

During the 111th Congress, there have been calls to revamp the resolution process for systemically significant financial institutions. Some of these proposals, such as H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009, and the Obama Administration's "Resolution Authority for Systemically Significant Financial Companies Act of 2009," would establish resolution regimes modeled after the FDIC's conservatorship/receivership authority. Other proposals, like H.R. 3310, the Consumer Protection and Regulatory Enhancement Act, would resolve these firms through a special provision of the Bankruptcy Code. In order to make a policy assessment concerning the appropriateness of these proposals, it is important to understand both the similarities and differences between insured depositories and other financial institutions large enough or interconnected enough to pose systemic risk to the U.S. economy upon failure, as well as the differences between the Bankruptcy Code and the FDIC's conservatorship/receivership authority. 

This report first discusses the purposes behind the creation of a separate insolvency regime for depository institutions. The report then compares and contrasts the characteristics of depository institutions with SSFCs. Next, the report provides a brief analysis of some important differences between the FDIC's conservatorship/receivership authority and that of the Bankruptcy Code. The specific differences discussed are: (1) overall objectives of each regime; (2) insolvency initiation authority and timing; (3) oversight structure and appeal; (4) management, shareholder, and creditor rights; (5) FDIC "superpowers," including contract repudiation versus Bankruptcy's automatic stay; and (6) speed of resolution. This report makes no value judgment as to whether an insolvency regime for SSFCs that is modeled after the FDIC's conservatorship/receivership authority is more appropriate than using (or adapting) the Bankruptcy Code. Rather, it points out the similarities and differences between SSFCs and depository institutions, and compares the conservatorship/receivership insolvency regime with the Bankruptcy Code to help the reader develop his/her own opinion. .


Date of Report: January 14, 2010
Number of Pages: 15
Order Number: R40530
Price: $29.95

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