New Rules On Bank Breakups
Federal regulators are expected to outline as early as Friday rules for seizing and dismantling a large financial firm that could allow some creditors to get a better deal than others in limited cases.
The Federal Deposit Insurance Corp., as part of a proposed rule, is expected to say that all creditors of large, nonbank financial firms should expect losses in a failure, according to people familiar with the government's plans. The rules are part of a broader effort to end the era when certain institutions were judged "too big to fail" because the government had no orderly way to dismantle them.
"Discretion breeds uncertainty; it creates additional risk," said Kenneth Scott, a law and business professor at Stanford. "Despite what your intent might be, it may lead creditors to cut off funding sooner and accelerate the process, not in any sense ameliorate it."