Can orderly liquidation solve the problems of bailouts and bankruptcies?

Nash, Betty Joyce; Pellerin, Sabrina; Walter, John R.

Briefing

Can orderly liquidation solve the problems of bailouts and bankruptcies?

Abstract: In response to the financial crisis of 2007?09, Congress created the Orderly Liquidation Authority (OLA), a new regime for winding down systemically important financial institutions (SIFIs) that become troubled. The OLA provisions address two conflicting goals: mitigating threats to the financial system associated with bankruptcy and minimizing moral hazard associated with government bailouts. This Economic Brief compares OLA provisions to bankruptcy procedures. Although the OLA process could be quicker and more flexible than bankruptcy, it may not limit systemic risk without increasing moral hazard.

Keywords: Financial markets; Moral hazard;