Beyond Bankruptcy: Resolution as a Macroprudential Regulatory Tool

Steven L. Schwarcz*

Postcrisis efforts to extend bankruptcy-resolution techniques to protect the stability of the financial system have been insufficient, in part because regulators have been conflating bankruptcy’s traditional goals of resolving troubled firms individually with the need to resolve critical elements of the financial system to ensure its continued operation as a “system.” This requires resolving troubled firms collectively, as well as resolving securities-trading markets and the infrastructure that serves to facilitate that trading. The Article examines how to design that regulation, differentiating three approaches: reactive regulation, which comprises variations on traditional bankruptcy; proactive regulation, which consists of preplanned enhancements that are designed to strengthen or facilitate the resolvability of financial system elements that start to become troubled; and counteractive regulation, which seeks to reduce the need for resolution (and thus is not truly resolution).

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© 2018 Steven L. Schwarcz. Individuals and nonprofit institutions may reproduce and distribute copies of this Article in any format at or below cost, for educational purposes, so long as each copy identifies the author, provides a citation to the Notre Dame Law Review, and includes this provision in the copyright notice.

*Stanley A. Star Professor of Law & Business, Duke University School of Law; Founding Director, Duke Global Financial Markets Center; Senior Fellow, the Centre for International Governance Innovation. E-mail: schwarcz@law.duke.edu. The author thanks Donald S. Bernstein, Stephen J. Lubben, Irit Ronen-Mevorach, and participants in a Duke Law School faculty workshop, the University of Texas School of Law “Jayfest” Symposium, the European Banking Institute Global Annual Conference on Banking Regulation, the University of Copenhagen Faculty of Law Distinguished Public Lecture, and the London Financial Regulation Seminar at London School of Economics for valuable comments, and Kris S. Liu, Nicholas Strzeletz, and Michael P. Sweeney for invaluable research assistance.