Many commentators viewed the distress and failure of a number of these institutions during the 2007-2009 crisis as highlighting the inadequacy of existing prudential regulations for such firms, and of the Bankruptcy Code for resolving their failure. The "Too-Big-To-Fail" Problem

When large, interconnected financial institutions become distressed, policymakers often face a choice between (1) a taxpayer-funded bailout, and (2) the destabilization of the financial system—a dilemma that commentators have labeled the "too-big-to-fail" (TBTF) problem. In response to the crisis, Congress passed and President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank), legislation that some commentators characterized as "the most ambitious overhaul of financial regulation in generations." Other portions of Dodd-Frank are specifically directed at the systemic risk created by TBTF financial institutions. In order to minimize the risks that large financial institutions like Lehman and AIG fail, Title I of Dodd-Frank establishes an enhanced prudential regulatory regime for certain large bank holding companies and non-bank financial companies. And in order to resolve systemically important financial institutions in the event that they nevertheless experience financial distress, Title II establishes a new resolution regime available for such institutions outside of the Bankruptcy Code. Specifically, the Title I regime applies to (1) all bank holding companies with total consolidated assets of $50 billion or more, and (2) any non-bank financial companies that the Financial Stability Oversight Council (FSOC) designates as systemically important. Non-Bank Designations to Date

To date, FSOC has designated four non-bank financial companies for enhanced supervision: AIG, General Electric Capital Corporation (GE Capital), Prudential Financial (Prudential), and MetLife. As a result of FSOC's rescission of its designations of AIG and GE Capital, and a decision by the U.S. District Court for the District of Columbia overturning MetLife's designation (discussed in " MetLife " infra ), Prudential remains the only non-bank financial company designated for enhanced supervision as of the publication of this report. Proposals to Alter Title I

			Proposed Legislation

A number of bills that would alter FSOC's authority to designate non-banks for enhanced regulation have been introduced in the 115 th Congress. H.R. Specifically, H.R. Accordingly, banks enjoy greater protection against "runs" by their derivatives counterparties in an FDIC resolution than do non-bank corporations in bankruptcy. Title II and the Orderly Liquidation Authority

These various legislative proceedings culminated in Title II of Dodd-Frank, which creates an "Orderly Liquidation Authority" (OLA) pursuant to which the FDIC can serve as the receiver for "failing financial companies that pose a significant risk to the financial stability of the United States." Upon a written recommendation, the Treasury Secretary shall seek appointment of the FDIC as receiver of the financial company if (in consultation with the President) he makes a "systemic risk determination"—that is, if he makes the following seven determinations:
1. the financial company is in default or in danger of default; 2. the failure of the financial company and its resolution under otherwise applicable federal or state law would have serious adverse effects on financial stability in the United States; 3. no viable private sector alternative is available to prevent the default of the financial company; 4. any effect on the claims or interests of creditors, counterparties, and shareholders of the financial company and other market participants as a result of actions to be taken under the relevant subchapter is appropriate, given the impact that any such action would have on financial stability in the United States; 5. the relevant action would avoid or mitigate such adverse effects, taking into consideration the effectiveness of the action in mitigating potential adverse effects on the financial system, the cost to the general fund of the Treasury Department, and the potential to increase excessive risk taking on the part of creditors, counterparties, and shareholders in the financial company; 6. a federal regulatory agency has ordered the financial company to convert all of its convertible debt instruments that are subject to the regulatory order; and 7. the company satisfies the definition of a "financial company." Administrative Rules

The OLA has never been used. However, federal agencies have promulgated a number of rules that affect Title II in important ways. During the post-crisis debate over financial reform, a bill introduced in the House ( H.R. Unlike H.R. The Financial CHOICE Act of 2017, which passed the House in June 2017, also proposes a number of changes to the Bankruptcy Code. Other proposals to amend the Bankruptcy Code to deal with large financial institutions have been introduced in the Senate.
When large, interconnected financial institutions become distressed, policymakers have historically faced a choice between (1) a taxpayer-funded bailout, and (2) the destabilization of the financial system—a dilemma that commentators have labeled the "too-big-to-fail" (TBTF) problem. The 2007-2009 financial crisis highlighted the significance of the TBTF problem. During the crisis, a number of large financial institutions experienced severe distress, and the federal government committed hundreds of billions of dollars in an effort to rescue the financial system. According to some commentators, the crisis underscored the inadequacy of existing prudential regulation of large financial institutions, and of the bankruptcy system for resolving the failure of such institutions.
In response to the crisis, Congress passed and President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) in 2010. Titles I and II of Dodd-Frank are specifically directed at minimizing the systemic risk created by TBTF financial institutions. In order to minimize the risks that large financial institutions will fail, Title I of Dodd-Frank establishes an enhanced prudential regulatory regime for certain large bank holding companies and non-bank financial companies. In order to "resolve" (i.e., reorganize or liquidate) systemically important financial institutions, Title II establishes a new resolution regime available for such institutions outside of the Bankruptcy Code.
The Title I regime applies to (1) all bank holding companies with total consolidated assets of $50 billion or more, and (2) any non-bank financial companies that the Financial Stability Oversight Council (FSOC) designates as systemically important. To date, FSOC has designated four non-bank financial companies for enhanced supervision: AIG, GE Capital, Prudential, and MetLife. However, FSOC has rescinded its designations of AIG and GE Capital as a result of changes to those companies, and MetLife successfully challenged its designation in federal court, leaving Prudential as the sole remaining designee as of the publication of this report.
Legislation that would repeal FSOC's authority to designate non-banks for enhanced supervision has passed the House of Representatives (H.R. 10), and a bill that would alter FSOC's designation process and standards in more limited ways has also been introduced in the House (H.R. 4061).
Title II of Dodd-Frank creates an "Orderly Liquidation Authority" (OLA) pursuant to which the Federal Deposit Insurance Corporation (FDIC) can serve as the receiver for failing financial companies that pose a significant risk to the financial stability of the United States. The OLA, which was developed as an alternative to the Bankruptcy Code, is similar to the mechanisms the FDIC uses to resolve failed commercial banks. The OLA grants the FDIC broad powers to manage the liquidation or sale of a failed financial company, and Title II includes provisions that offer financial institutions more robust protections against "runs" by their derivatives counterparties than they would have under the Bankruptcy Code. The FDIC, Federal Reserve, and Office of the Comptroller of the Currency have promulgated a number of rules that have important consequences for the OLA concerning the FDIC's powers as receiver, its general strategy for resolving failed institutions, "loss-absorbing capacity" requirements for certain bank holding companies, and derivatives contracts.
There have also been a number of proposals to reform Title II. A bill that would (among other things) repeal Title II passed the House in June 2017, and bills to amend the Bankruptcy Code to allow it to deal more effectively with the failure of large financial institutions have been introduced in the House and the Senate (H.R. 10 (115th Cong.), H.R. 1667 (115th Cong.), S. 1840 (114th Cong.)).