FSOC - White Paper - Report to the Congress on Secured Creditor Haircuts - July 2011

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July 2011

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) calls for the Financial Stability Oversight Council to study whether treating a portion of fully secured creditors' claims as unsecured ("secured creditor haircutting") would promote the Act's goals of market discipline and taxpayer protection.

This study analyzes whether secured creditor haircuts should be imposed by the Orderly Liquidation Authority (OLA).

Proponents suggest that haircuts would:

  • encourage better credit analysis by creditors;
  • protect taxpayers by giving the U.S. a higher priority over secured claims; and
  • reduce collateral demands on distressed firms and protect value.

Opponents suggest that haircutting would:

  • limiting the availability of secured lending in a crisis;
  • negatively impact borrowers' cost of funds; and
  • lead financial firms to rely on other types of financing.

After analyzing secured creditor haircutting with regards to the Bankruptcy Code, the Federal Deposit Insurance Act, the OLA, Basel III, and other reforms, the study concludes that "the new supervisory framework provided by Title I of the Dodd-Frank Act can be used to achieve the goals of market discipline and taxpayer protection effectively in the absence of secured creditor haircuts."

The study also includes Appendix A, which gives an overview of cetain forms of secured lending, such as repurchase agreements, stock loan and stock borrow, and "sell-buyback" arrangements.


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