U.S. Corporate and Bank Insolvency Regimes: An Economic Comparison and Evaluation

Abstract

In the U.S., the insolvency resolution of most corporations is governed by the federal bankruptcy code and is administered by special bankruptcy courts. Most large corporate bankruptcies are resolved under Chapter 11 reorganization proceedings. However, commercial bank insolvencies are governed by the Federal Deposit Insurance Act and are administered by the FDIC. These two resolution processes--corporate bankruptcy and bank receiverships--differ in a number of significant ways, including the type of proceeding (judicial versus administrative); the rights of managers, stockholders and creditors in the proceedings; the explicit and implicit goals of the resolution; the prioritization of creditors--claims; the costs of administration; and the timeliness of creditor payments. These differences derive from perceptions that "banks are special." This paper elucidates these differences, explores the effectiveness of the procedural differences in achieving the stated goals, and considers the potential economic consequences of the different structures.