Equity for Intermediaries: The Resolution of Financial Firms in Bankruptcy and Bank Resolution 

This Essay considers the role of bankruptcy law in the legal ecosystem that regulates banks and other financial intermediaries. It uses the recent spate of bank and crypto intermediary failures to consider the role of bankruptcy courts (and other resolution institutions) in protecting both customers, and the stability of the financial system when the instability of a financial intermediary threatens to spread contagion throughout the financial system. It expands the definition of bankruptcy to comprise the various regimes for resolving the debts of financial intermediaries, and identifies common themes that operate (and should operate symmetrically) across those resolution regimes. The Essay develops three concepts—“equitable realization,” “constitutive priority” and “fiat priority”—that together instantiate an affirmative and complementary role for bankruptcy courts in the regulation of financial intermediaries that I call “constitutive equity.” These principles seek to balance the imperatives of financial system stability, value preservation, and fair treatment of competing stakeholders.