Can the “Single Point of Entry” strategy be used to recapitalize a systemically important failing bank?

The Single Point of Entry (SPOE)-the FDIC strategy to implement its new Dodd-Frank Orderly Liquidation Authority (OLA)-promises to reduce the financial market turmoil caused by the failure of a large complex financial institution by using parent holding company resources to recapitalize its large failing subsidiary banks. We identify legal and financial impediments that may prevent the use of a SPOE strategy for this purpose. Dodd-Frank does not authorize bank recapitalizations through SPOE or otherwise, and the OLA cannot be invoked unless the failure of a subsidiary puts the parent in danger of default. The imprecise legislative language that authorizes OLA creates a new source of systemic risk. Regulations required to operationalize SPOE will require bank holding companies to issue a substantial volume of new subordinated debt, increasing these institutions' leverage and financial fragility. Unless the Dodd-Frank Act is amended, OLA could well magnify and not reduce market instability in the next financial crisis.