Who’s Down with OCC(‘s Definition of “Banks”)?
by | posted in: Bankruptcy, Bankruptcy Administration and Jurisdiction, Chapter 11, Financial Firms and Safe Harbors | 0

By Matthew A. Bruckner (Howard University School of Law)

Matthew A. Bruckner

The number and importance of fintech companies, such as Venmo, CashApp, SoFi, Square, PayPal, and Plaid, continue to rise. As they’ve expanded, some fintech companies have considered it useful to pursue bank charters. For example, Figure, Varo and SoFi have all received at least preliminary approval for a traditional national bank charter.

However, the Office of the Comptroller of the Currency (the OCC) has decided to offer a more limited form of bank charter—a special purpose national bank charter. And it’s been offering these so-called fintech charters to entities that are, at best, bank-like.

Other regulators, such as the New York State Department of Financial Services and the Conference of State Bank Supervisors, have been none too happy about this development. Both have repeatedly sued the OCC, claiming that the charter oversteps the OCC’s authority. That litigation has centered on whether these fintech companies are sufficiently bank-like to obtain an OCC charter. So far, the OCC has successfully fended off litigation because of plaintiff’s lack of standing, but further substantive litigation seems exceedingly likely.

In a new article, I explore the question of whether the OCC’s decision to grant bank charters to fintech companies makes them banks for bankruptcy purposes. The question matters because banks are ineligible for bankruptcy relief. This Article considers the legal and policy arguments that are likely to be presented to bankruptcy judges about whether special purpose national banks are banks within the meaning of the Bankruptcy Code. I conclude that bankruptcy judges are likely to disregard the OCC’s interpretation and conclude that special purpose national banks are not banks for bankruptcy purposes.

As non-banks, special purpose national banks are bankruptcy-eligible. This raises a host of issues that I address in this Article. These include that, in some cases, a special purpose national bank will be able to rush to bankruptcy court to take advantage of the automatic stay if the OCC tries to revoke its charter. Also, the bankruptcy process may supersede the OCC’s newly-created (and never yet used) special purpose national bank liquidation proceedings.

These and other issues are explored in more detail in the Article, which can be found here.

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Note: This is the Harvard Law School Bankruptcy Roundtable’s last scheduled post for the summer of 2022.  The BRT intends to resume posting around mid-September.  The BRT wishes all its readers an enjoyable remainder of the summer!

 

Insolvency of Significant Non-Financial Enterprises: What Can We Learn from Bank Failures and Bank Resolution?
by | posted in: Bankruptcy Reform, Bankruptcy Roundtable Updates, International and Comparative | 0

By Ilya Kokorin, Leiden Law School (The Netherlands)

Ilya Kokorin

The current economic downturn triggered by the spread of COVID-19 demonstrates that the role of insolvency law should not be restricted to resolving conflicts between private parties (i.e. creditors and debtors). Nevertheless, the very framework of insolvency law remains primarily: (i) microprudential – single entity focused and designed to protect individual debtors and their creditors, (ii) contractarian – implementing the idea of creditors’ bargain and solving coordination problems between creditors of a single entity, and (iii) reactive – centred around post-crisis liquidation of assets and allocation of proceeds among creditors. It may therefore be ill-fitted to serve the public interest in mitigating the negative externalities of large-scale (systemic) corporate debacles (e.g. Chrysler, GM, British Steel, Carillion) or handling the economy-wide instability experienced nowadays.

In contrast to corporate insolvency, in the aftermath of the global financial crisis of 2008 (GFC), bank resolution in the European Union (EU) and the USA went through fundamental changes that seek to preserve financial stability and ensure continuity of critical functions. Bank resolution has increasingly embraced the macroprudential vision, recognizing the need for an advanced preparation and a speedy intervention to ensure continuity of critical functions, preservation of financial stability and avoidance of bailouts. This vision has resulted in the specific proactive and reactive recovery and resolution strategies. In the recent paper Insolvency of Significant Non-Financial Enterprises: Lessons from Bank Failures and Bank Resolution, I explore whether the modern approaches to bank crises can be extended to non-financial enterprises. I discuss how insolvency law might help minimize social harm stemming from wide-ranging shocks and grand-scale business failures and suggest what we can learn from bank failures and bank resolution.

The failure of Carillion, once the UK’s second-largest construction company, has shown that the reactive approach to crisis resolution, centred around post-crisis intervention, posed significant risks not only for creditors but also for other stakeholders and communities at large. Carillion had around 43,000 workers, of whom 19,000 were based in the UK. It owed around GBP 2 billion to the extensive network of 30,000 suppliers, sub-contractors and other creditors and left the pension liability exceeding GBP 2.5 billion. Even though the signs of financial distress appeared long before Carillion filed for liquidation in January 2018, these warning signals were largely ignored. The failure of Carillion had substantial implications for the provision of public services, raising environmental, health and safety concerns. It ultimately led to a state intervention backed by taxpayers’ money. However, the actual economic and social cost of Carillion’s insolvency are hard to quantify. Financial distress of such a significant enterprise (significant non-financial enterprise or SNFE) required timely state intervention. Nevertheless, its multiple profit warnings came as a surprise to the Cabinet Office.

Insolvency of Carillion was characterized by the absence of timely reaction to prevent crisis escalation, a genuine threat of public disruption and a vast complexity determined by both the debtor’s organizational structure, consisting of more than 320 group members, and the nature of its activities. Many of the same features were observed in the failure of banks and banking groups during the GFC. As a response, both the EU (BRRD) and the USA (Title II of the Dodd-Frank Act) have embraced a proactive and precautionary approach focused on preparation and early response. In my paper, I use the case of Carillion to inquire whether selected bank recovery and resolution tools could have been adopted to prevent the collapse of Carillion, or to mitigate its negative consequences.

In particular, I analyse three such tools, namely: (i) intervention powers granted to state authorities for early (preventive) reaction to the escalation of financial problems before the actual insolvency, (ii) entity and group recovery and resolution planning, and (iii) administrative-led insolvency process. I conclude that while the first two mechanisms may prove beneficial, the last one is rather controversial. While an administrative-led process has certain advantages and prevails in bank resolution, it may be difficult and unnecessary to replicate or transpose to non-financial enterprises. Instead, a transparent court-supervised process with active involvement of creditors and debtors, as well as a limited and targeted engagement of public authorities on matters of public interest should be encouraged.

The full paper is available here.