US CONSIDERATIONS RESPECTING FINANCIAL INSTITUTION INSOLVENCY

Pages47-66
DOIhttps://doi.org/10.1108/eb024867
Publication Date01 Jan 1996
AuthorROBERT J. ROSENBERG,MARLA S. BECKER
SubjectAccounting & finance
US CONSIDERATIONS RESPECTING FINANCIAL
INSTITUTION INSOLVENCY
Received:
13th
November,
1995
ROBERT J. ROSENBERG AND MARLA S. BECKER
ROBERT
J.
ROSENBERG
IS A MEMBER
OF
NEW YORK LAW FIRM
LATHAM & WATKINS.
HE
WAS
AN
ADJUNCT
PROFESSOR
AT
NEW YORK UNIVERSITY
SCHOOL
OF
LAW
WHERE HE TAUGHT
BANKRUPTCY REORGANISATION
AND
BUSINESS PLANNING.
MARLA
S.
BECKER
PRACTISES AS A MEMBER OF THE SAME FIRM,
FOCUSING
ON
BANKRUPTCY, WORKOUTS,
RESTRUCTURINGS AND FINANCE.
THE AUTHORS
CAN BE
CONTACTED
AT
LATHAM
&
WATKINS, 53RD AT THIRD, SUITE
1000, 885 THIRD AVENUE, NEW YORK, NEW-
YORK 10022-4802, TEL. 1(212)
906 1200,
FAX. 1(212)751-4861.
ABSTRACT
This
paper first
generally discusses
United
States
bank
liquidations
under the Finan-
cial Institutions Reform, Recovery
and
Enforcement
Act
of
1989 (FIRREA),
and
addresses
the
purposes
and
impact upon
US financial institutions
of
FIRREA.
It
also
addresses
the
role
and
powers
of
the
FDIC as
affected by
FIRREA. The
second
section discusses
the use of
ancillary
bank-
ruptcy petitions
in
the
United States
to aid
in
the
liquidations
of
foreign financial
institutions.
The
paper
concludes
with
a
discussion
of
the availability
of
plenary
bankruptcy
relief for foreign bank holding
companies
and foreign banks
not
engaged
in banking
business
in
the
United
States.
UNITED STATES BANKS LIQUI-
DATIONS UNDER FIRREA
Purpose
of FIRREA
In
1989,
Congress approved
and
President Bush signed into
law the
Financial Institutions Reform, Recov-
ery
and
Enforcement
Act of 1989
(FIRREA).1 FIRREA
was
originally
introduced
as a
response
to the
crisis
that
had
arisen
in the
financial insti-
tution industry during
the
1970s
and
1980s.
In
particular, FIRREA
was
enacted
to
combat
the
fraud, mis-
management
and
incompetence
rampant
in the
savings
and
loan
(S&L
or
thrift) industry.
A
congres-
sional report
in 1989
listed
the
causes
of
the
crisis
as:
'poorly timed dereg-
47
JOURNAL OF FINANCIAL REGULATION AND COMPLIANCE VOLUME FOUR NUMBER ONE
ROSENBERG AND BECKER
ulation; the dismal performance of
some thrift managements; inadequate
oversight, supervision and regulation
by government regulatory agencies
and the Reagan Administration;
regional economic collapse; radical
deregulation by several large states;
and outright fraud and insider
abuse'.2 As a result of such misman-
agement, a large number of thrift
institutions failed, threatening to
deplete the deposit insurance funds
regulated by the Federal Savings and
Loan Insurance Corporation.
The goal of FIRREA is widely con-
sidered to be the protection of feder-
ally funded depository institutions
and insurance agencies. FIRREA was
enacted to establish a 'new era for
insured institutions and their regula-
tors'.3
FIRREA represents a broad legis-
lative attempt to resolve the financial
crisis confronting the S&L industry.4
The regulatory changes and purposes
of FIRREA are expressed in part as
follows:
- to improve the supervision of sav-
ings associations by strengthening
capital, accounting and other
supervisory standards
- to curtail investments and other
activities of savings associations that
pose unacceptable risks to the fed-
eral deposit insurance funds
- to promote the independence of
the Federal Deposit Insurance Cor-
poration from the institutions the
deposits of which it insures, by pro-
viding an independent board of
directors, adequate funding and
appropriate powers
- to establish an Office of Thrift
Supervision in the Department of
the Treasury under the general
oversight of the Secretary of the
Treasury
- to establish a new corporation, to
be known as the Resolution Trust
Corporation, to contain, manage
and resolve failed savings associa-
tions
- to strengthen the enforcement
powers of federal regulators of
depository institutions.5
Impact
of FIRREA
The impact of FIRREA has been felt
by financial institutions outside the
thrift industry. The thrift crisis 'sim-
ply set the stage for structural
reforms, new Financing mechanisms
and strengthened enforcement
powers that will cause sweeping
changes in the operations and struc-
ture of the financial services
industry'.6 As discussed below, FIR-
REA:
- significantly expanded the role,
functions and powers of the Fed-
eral Deposit Insurance Corporation
(FDIC)
- expanded the use of the 'bridge
bank' concept to minimise the costs
of rescuing failed banking institu-
tions
- significantly increased the liability
of bank holding companies and
affiliates of failed institutions
- provided that the FDIC's liability to
depositors was limited to a statu-
tory maximum based on the liqui-
dation value of the failed institution
- dramatically increased civil and
criminal penalties for those found
liable for contributing to the failure
of such financial institutions.
General powers
of the FDIC as
affected by
FIRREA
The FDIC is the most important gov-
ernment agency that regulates
48

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