by Jeffrey M. Lacker, President Federal Reserve Bank of Richmond
Here are the highlights of my speech at the National Conference of Bankruptcy Judges Annual Meeting at Chicago, Ill.
- The bankruptcy process is an effective tool for reconciling the incentives of creditors and debtors. Yet the government has a long history of handling large complex financial institutions outside the Bankruptcy Code.
- This has created two mutually reinforcing conditions: Investors feel protected by an implicit commitment of government support, and policymakers feel compelled to provide that support to avoid a disruptive adjustment of expectations.
Â
- The Orderly Liquidation Authority created by the Dodd-Frank Act retains many of the flaws of ad-hoc pre-crisis practices and does little to improve creditors’ incentives to monitor risk-taking.
- A better strategy for ending “too big to fail†is the provision in the Dodd-Frank Act requiring large financial firms to prepare “living wills†detailing how they could be resolved under the Bankruptcy Code.
- Resolution planning is difficult work, but living wills must be credible in order for policymakers to commit to using them rather than relying on government backstops.
Â
The text of the speech in full:
