SOURCE: Federal Reserve Bank of Richmond

August 07, 2012 08:49 ET

Richmond Fed's Economic Quarterly Addresses Bankruptcy and the Orderly Liquidation Authority

RICHMOND, VA--(Marketwire - Aug 7, 2012) -  In response to the financial crisis of 2007-2008, Congress created the Orderly Liquidation Authority (OLA) as part of its financial regulatory reform bill, the Dodd-Frank Act. The OLA's provisions are aimed at simultaneously addressing two conflicting goals -- mitigating systemic risk, which is thought to emerge when large financial firms enter the bankruptcy process, while also minimizing moral hazard, which arises when investors believe that firms are likely to be granted a government bailout to save them from bankruptcy and prevent systemic problems. In this issue of Economic Quarterly, Sabrina R. Pellerin and John R. Walter review the features of both bankruptcy and the OLA and identify how certain provisions of the OLA aim to address apparent weaknesses inherent in the core features of bankruptcy when resolving systemically important financial institutions, and specifically, how these provisions intend to balance the conflicting goals of limiting systemic risk and the almost inevitable increase in moral hazard.

You can find the full text of this article and others in the latest issue of Economic Quarterly on our website.

Also in the First Quarter 2012 issue:

  • Contingent Capital: The Trigger Problem by Edward Simpson Prescott
  • Exchange Rate Volatility in a Simple Model of Firm Entry and FDI by Thomas A. Lubik and Katheryn N. Russ

The Economic Quarterly is a free publication containing economic analysis pertinent to Federal Reserve monetary and banking policy. For more information, contact the Federal Reserve Bank of Richmond's Research Department--Publications at 800.322.0565 or visit

The Richmond Fed serves the Fifth Federal Reserve District, which includes the District of Columbia, Maryland, North Carolina, South Carolina, Virginia and most of West Virginia. As part of the nation's central bank, we're one of 12 regional Reserve Banks that work together with the Federal Reserve's Board of Governors to strengthen the economy and our communities. We manage the nation's money supply to keep inflation low and help the economy grow. We also supervise and regulate financial institutions to help safeguard our nation's financial system and protect the integrity and efficiency of our payments system.

Contact Information

  • Contacts:
    John Weinberg
    Director of Research
    Federal Reserve Bank of Richmond

    Amanda Kramer
    Managing Editor
    Federal Reserve Bank of Richmond Economic Quarterly
    Email Contact