Bank Resolution Archives - Columbia Law Review

Introduction Spring 2023 saw the second, third, and fourth largest bank failures in U.S. history. Within six weeks of the first failure, First Republic Bank ($229 billion in assets), Silicon Valley Bank (SVB) ($209 billion), and Signature Bank ($110 billion) were each sold to other banks.[footnote]Bank Failures: 2023 in Brief, FDIC, https://www.fdic.gov/resources/resolutions/ bank-failures/in-brief/2023 [https://perma.cc/MKF4-DYZD ] (last visited Jan. 14, 2025).[/footnote] Academic and popular commentary on the 2023 banking crisis has covered its regulatory background,[footnote]See Christine Desan, Lev Menand, Raúl Carrillo, Rohan Grey, Dan Rohde & Hilary J. Allen, Six Reactions to the Silicon Valley Bank Debacle, LPE Blog (Mar. 23, 2023), https://lpeproject.org/blog/six-reactions-to-the-silicon-valley-bank-debacle/ [https://perma.cc/FDR7-F7FY] noting shortcomings in bank supervision, regulation, deposit insurance, technology, and more).[/footnote]supervisory shortfalls,[footnote]See A Failure of Supervision: Bank Failures and the San Francisco Federal Reserve: Hearing Before the Subcomm. on Health Care & Fin. Servs. of the H. Oversight Comm., 118th Cong. 9 (2023) (statement of Kathryn Judge, Harvey J. Goldschmid Professor of Law, Columbia Law School), https://www.congress.gov/118/chrg/CHRG-118hhrg52572/ CHRG-118hhrg52572.pdf [https://perma.cc/7LPK-383J] (“Shortcomings in bank supervision . . . played a meaningful role contributing to the recent bank failures.”); Jeanna Smialek & Emily Flitter, Federal Reserve and Lawmakers Eye Bank Rules After Collapse, N.Y. Times (Mar. 15, 2023), https://www.nytimes.com/2023/03/15/business/economy/silicon-valley-bank-federal-reserve-regulation.html (on file with the Columbia Law Review ) (“The Federal Reserve is facing criticism over Silicon Valley Bank’s collapse, with lawmakers and financial regulation experts asking why the regulator failed to catch and stop seemingly obvious risks.”).[/footnote] deposit insurance coverage,[footnote]Compare Michael Ohlrogge, Why Have Uninsured Depositors Become De Facto Insured?, 100 N.Y.U. L. Rev. (forthcoming 2025) (manuscript at 43), https:// ssrn.com/abstract=4624095 [https://perma.cc/6L43-GMFK] (“FDIC mission creep is the best available explanation for the recent rise in FDIC resolution costs and in uninsured depositor rescues.”), with Lev Menand & Morgan Ricks, Scrap the Bank Deposit Insurance Limit, Wash. Post (Mar. 15, 2023), https://www.washingtonpost.com/opinions/2023/ 03/15/silicon-valley-bank-deposit-bailout/ (on file with the Columbia Law Review ) [hereinafter, Menand & Ricks, Deposit Insurance] (“Large depositors are both bad at monitoring banks and perfectly capable of engaging in destabilizing runs.”).[/footnote] cryptocurrency entanglement,[footnote]See Amy Castor & David Gerard, Crypto Collapse: Silvergate Implosion Continues, Signature Bank, Tether Lied to Banks, Voyager, Celsius, Amy Castor: Blog (Mar. 4, 2023), https://amycastor.com/2023/03/04/crypto-collapse-silvergate-implosion-continues-signature-bank-tether-lied-to-banks-voyager-celsius/ [https://perma.cc/A3TC-AWE3] (“There were two banks critical to US crypto. Silvergate on the West Coast and Signature Bank in New York.”).[/footnote] lender of last resort activity,[footnote]See Hal S. Scott & Connor R. Kortje, Lender of Last Resort: The 2023 Banking Crisis and COVID, at 9 (Sept. 8, 2023) (unpublished manuscript), https://ssrn.com/ abstract=4566160 [https://perma.cc/XB2X-DTH4] (“[O]perational and procedural shortcomings, as well as an ostensible assessment by the Fed that SVB’s assets were insufficient to collateralize a loan of sufficient size to stem the run, prevented the FHLB and Fed from acting as effective lenders of last resort.”).[/footnote] and more.[footnote]See Nathan Tankus, Every Complex Banking Issue All at Once: The Failure of Silicon Valley Bank in One Brief Summary and Five Quick Implications, Notes on the Crises (Mar. 14, 2023), https://www.crisesnotes.com/every-complex-banking-issue-all-at-once-the-failure-of-silicon-valley-bank-in-one-brief-summary-and-five-quick-implications/ [https://perma.cc/8M5L-URT5] (covering the Federal Reserve’s collateral schedule, Bank Term Funding Program, and 13(3) emergency lending authority; the least cost test and systemic risk exception; tying arrangements and their banking law exceptions; and more).[/footnote] The Federal Deposit Insurance Corporation (FDIC) responded with a report on deposit insurance reform and an amendment to its 2012 resolution plan rule.[footnote]12 C.F.R. § 360.10 (2024); FDIC, Options for Deposit Insurance Reform (2023), https://fdic.gov/system/files/2024-07/options-deposit-insurance-reform-full.pdf [https://perma.cc/WNH7-JHY5]; see infra note 287 and accompanying text.[/footnote] The suite of banking agencies proposed new long-term debt requirements.[footnote]Long-Term Debt Requirements for Large Bank Holding Companies, Certain Intermediate Holding Companies of Foreign Banking Organization, and Large Insured Depository Institutions, 88 Fed. Reg. 64,524 (proposed Sept. 19, 2023) (to be codified at 12 C.F.R. pts. 3, 54, 216–17, 238, 252, 324, 374).[/footnote] But there is a problem yet to be examined: Bank resolution law allocates coordination rights—the right to legally permitted economic coordination[footnote]See Sanjukta Paul, Antitrust as Allocator of Coordination Rights, 67 UCLA L. Rev. 378, 380 (2020) [hereinafter Paul, Allocator]; Sanjukta Paul & Nathan Tankus, The Firm Exemption and the Hierarchy of Finance in the Gig Economy, 16 U. St. Thomas L.J. 44, 45 (2019). In other words, coordination rights are the set of legal permissions and restrictions governing how people work together to provide goods and services.[/footnote]—and it does so on an incoherent basis.

Coordination rights are primarily allocated by antitrust law.[footnote]See Paul, Allocator, supra note 10, at 380.[/footnote] Antitrust favors vertical coordination of economic activity with concentrated control (e.g., within hierarchical firms) rather than horizontal coordination of economic activity between firms or individuals (e.g., cartels or cooperatives).[footnote]See id. at 383, 424–25; Paul & Tankus, supra note 10, at 44.[/footnote] For example, rideshare drivers who collectively set prices for their services may be illegally conspiring under antitrust law, but it is presumptively legal for Uber or Lyft to set prices for those same rideshare services.[footnote]See Paul & Tankus, supra note 10, at 46–47; see also 15 U.S.C. § 1 (2018) (“Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.”); Marshall Steinbaum, Uber’s Antitrust Problem, Am. Prospect (May 11, 2016), https://prospect.org/labor/uber-s-antitrust-problem/ [https://perma.cc/7Q2X-NML9] (discussing a challenge to this pattern in a lawsuit filed by Uber drivers, which was subsequently moved to arbitration by Uber without a decision on the merits); infra note 27.[/footnote] Orthodox accounts justify this pattern by appealing to competition, consumer welfare, and efficiency.[footnote]See infra section I.A.1.[/footnote]

Meanwhile, when commercial enterprises suffer financial distress, they often enter federal bankruptcy.[footnote]See generally Chapter 11—Bankruptcy Basics, U.S. Cts., https:// www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics [https://perma.cc/R5BE-GZPZ] (last visited Oct. 15, 2024) (describing the “reorganization” bankruptcy process from start to finish).[/footnote] Bankruptcy triggers an automatic stay, shielding enterprise assets from creditors.[footnote]See 11 U.S.C. § 362 (2018).[/footnote] This process favors vertical coordination to some extent: Firms are reorganized, not liquidated (i.e., sold off in pieces to other firms), if they have value as a going concern, and reorganized firms retain decisionmaking hierarchy.[footnote]See, e.g., Richard M. Hynes & Steven D. Walt, Why Banks Are Not Allowed in Bankruptcy, 67 Wash. & Lee L. Rev. 985, 1037 (2010) (“[A] traditional Chapter 11 reorganization can resolve a failed firm without an actual sale of its assets.”).[/footnote]

But banks do not enter bankruptcy.[footnote]See id. at 993–94 (contrasting bankruptcy with bank resolution).[/footnote] When a bank fails, it triggers a legal process known as resolution.[footnote]See, e.g., FDIC, Resolutions Handbook 5 (2019), https://www.lb7.uscourts.gov/ documents/18c8697.pdf [https://perma.cc/PG9V-9DKA] (“Resolution activities begin when an institution’s primary regulator notifies the FDIC of the potential failure.”).[/footnote] Resolution is governed by the Federal Deposit Insurance Act (FDIA).[footnote]Federal Deposit Insurance Act of 1950, Pub. L. No. 81-797, §§ 11, 13, 64 Stat. 873, 884–89 (codified at 12 U.S.C. §§ 1811–1835a (2018)). Note that the FDIC itself was created by an earlier statute, the Banking Act of 1933, Pub. L. No. 73-66, 48 Stat. 162 (codified as scattered sections of 12 U.S.C.).[/footnote] Although the FDIA does not expressly address how coordination rights should be allocated, in practice, the FDIC prefers to use a resolution method that transfers as much as possible of a failed bank’s balance sheet to another bank, increasing the concentration of coordination rights compared to the status quo ante.

This Note makes two claims. First, bank resolution allocates coordination rights. It decides which parts of the failed bank’s balance sheet it will transfer, to whom it will be transferred, and thus how the post-resolution balance sheet and bank charter will be controlled. The FDIC’s preference for merging a failed bank into another bank privileges hierarchical firm-based coordination for banks, just like antitrust does for nonbank firms. But resolution’s allocation of coordination rights need not follow antitrust’s default allocation. Instead, failed banks could be reconstituted with different firm boundaries or more horizontal intrafirm relations. In other words, a failed bank could be broken up or reorganized as a quasi-worker cooperative—both outcomes that would disperse coordination rights.

Second, resolution’s reflexive concentration of coordination rights is unsupported. While it mirrors antitrust’s allocation, it is not justified by antitrust’s orthodox criteria: competition, consumer welfare, and productive efficiency. Nor is it justified by the rationales underlying banking law, or even by those internal to resolution law. In fact, all these criteria clash with the FDIC’s resolution-by-merger preference.[footnote]See infra Part II.[/footnote] This reveals that, without good reason, the Agency defers to antitrust’s favor for hierarchical firms.

This Note argues the FDIC can solve this problem by reallocating coordination rights after banks fail. One option is to disperse interfirm coordination rights. The FDIC could draw firm boundaries such that resolution no longer results in one bank where previously there were two. Another option is to disperse intrafirm coordination rights. A new resolution method outlined herein—the intrafirm reallocation transaction (IRT)—could do both, breaking up banks and flattening intrafirm hierarchy as desired. Doing so would better fulfill the criteria of antitrust, banking, and resolution law.

This Note proceeds as follows. Part I explains what coordination rights are, how they are allocated, and why. It also describes the basic structure and aims of banking law and bank resolution. Part II searches for, but struggles to find, justification for the FDIC’s approach to allocating coordination rights in bank resolution. Part III explores alternatives. It shows how the banking agencies could use tools already at their disposal to disperse coordination rights and bring coherence to resolution law. It proposes a new resolution method, IRT, which it argues would best align the practice of bank resolution with the goals of antitrust and banking.