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FDIC Sets Claw Back, Bank Failure Rules

Stocks in this article: JPM

WASHINGTON ( TheStreet) - The Federal Deposit Insurance Corp. on Tuesday proposed rules to implement its authority to liquidate financial companies considered "to big to fail" under the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama last July.

The new proposed rule helps to "define how compensation may be clawed back from senior executives and directors responsible for the failure of the covered financial company." The FDIC said that in response to comments, it was making an effort to "harmonize" the liquidation rules with the U.D. Bankruptcy code.

The new rule proposal also addresses "broader issues that define the rights of creditors" of companies in FDIC receivership, clarifying the order of payment for creditors, defining terms such as "administrative expenses" and "amounts owed to the United States," and the creation and handling of claims on "bridge companies" created in the wake of a failure, for an orderly wind-down of assets.

Part of the FDIC's "orderly liquidation authority" mandate under Dodd-Frank is that the agency "as receiver may recover from senior executives and directors who were substantially responsible for the failed condition of a covered financial company any compensation that they received during the two-year period preceding the date on which the FDIC was appointed as receiver."

In cases of fraud, the two-year limit wouldn't apply. The rule proposal went into some detail on how the agency would determine an executive's level of responsibility for a large financial institution's failure.

The new rules - subject to a 60-day comment period - continues the FDIC's efforts to "develop the framework" for orderly liquidation of large financial companies that was started in October.

That proposal lead to an "interim final rule" in January, that addressed the payment of claims by creditors, contracted parties and shareholders of failing financial institutions, and the limitations of liens on the FDIC.

Thorough Bank Failure Coverage

TheStreet has provided detailed coverage of every bank failure since the current wave of closures began in 2008. The largest failure during the current crisis, and by far the largest in United States history, was Washington Mutual, which was shuttered by the Office of Thrift Supervision in September 1998 and sold by the FDIC to JPMorgan Chase (JPM).

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