The Federal Deposit Insurance Corp, a top US regulator of the banking sector, has proposed to set new rules that detail how creditors will be dealt with under the new authority given to the government to dismantle financial institutions in trouble.
According to a source familiar with the proposal has said that the rule will make certain that creditors of large, non-bank financial institutions understand that they will incur losses in cases of failure.
The work by the FDIC is said to be causing concern among other financial regulators implementing enacted laws of reform to Wall Street in the aftermath of the 2007-2009 crisis, which has triggered the US’s most severe downturn since the Great Depression in the 1930s. Financial firms across the board will be keeping a close watch on how the FDIC plans to use its new powers of liquidation to treat creditors.
The Wall Street Journal has reported that officials at the Treasury Department appear concerned that creditors may pull out of firms if they hit trouble, creating a “run” from the firms if the creditors think they will be hit herder by the FDIC during liquidation.
Sheila Bair, FDIC Chairman assures critics that creditors will be treated like they would be in a normal bankruptcy, "The authority to differentiate among creditors will be used rarely and only where such additional payments are essential to the implementation of the receivership or any bridge financial company," she reassured in a recent statement.