I want to end by briefly addressing several criticisms that have been made of the Dodd-Frank Act's orderly liquidation authority and the Board's TLAC proposal. One criticism is that there is no need for the backup orderly liquidation authority because the Bankruptcy Code provides an adequate framework for the resolution of any financial company. As Title II of the Dodd-Frank Act recognizes, however, the Bankruptcy Code may not be adequate to minimize the systemic impact of the resolution of a systemically important financial firm. The Bankruptcy Code does not direct the judge to take financial stability into account in making decisions, and it does not provide other important stabilizing features of the orderly liquidation authority, such as government liquidity support and stay-and-transfer treatment for qualified financial contracts.
A related line of criticism holds that the orderly liquidation authority enshrines "too big to fail" and provides for taxpayer bailouts of systemically important firms through the orderly liquidation fund. However, under the Board's proposed TLAC rule, a failed GSIB would be recapitalized by its private-sector long-term creditors (whose debt claims would be converted into equity), not by the government. The orderly liquidation fund would be used only to provide liquidity support, not to inject capital...The rating agencies no longer assume that the U.S. government will take extraordinary actions to prevent the failure of systemically important U.S. financial firms.
Finally, one criticism that has been leveled at our TLAC proposal is that imposing long-term debt requirements on GSIBs will lead those firms to increase their leverage and thereby raise their probability of failure, and that they should instead be required to hold higher levels of equity capital... [T]o protect financial stability, we must reduce not only the probability that a GSIB will fail, but also the damage that its failure could do if it were to occur. At the point of failure, a banking firm's equity capital is likely to be zero or negative, so to improve GSIB resolvability, our proposal requires GSIBs to have a thick tranche of gone-concern loss-absorbing capacity to ensure that resolution authorities will have the necessary raw material to manufacture fresh equity and recapitalize and stabilize the firm...