The Federal Deposit Insurance Corp. proposed a rule Friday on how it would treat creditor claims on resolving failed financial institutions under the Dodd-Frank Act. Under Dodd-Frank, an industry-wide reform bill signed into law in July, the FDIC would be appointed receiver of any financial institution considered too big to fail, meaning its liquidation through usual bankruptcy procedures would pose a significant risk to the entire economy. Sheila Bair, chairman of the FDIC, said before Congress in September it is authorized to write 44 new rules on how it would carry out its role under the new reform. Under the proposal, the FDIC would bar creditors holding long-term senior debt, subordinated debt, or equity interests from receiving additional payments that would give them more than other creditors with the same priority of payments. Those additional payments, according to the FDIC, would not maximize the value of the assets, minimize losses, or even been essential to implementing receivership of the troubled institution. According to the proposal, no creditor would be able to receive any additional payment unless the FDIC Board of Directors votes that the payments met those standards. Even if the vote does go through, the payment can be withdrawn and recouped if the ultimate recoveries from the failed institution are not enough to repay any temporary government capital support. "In no event may taxpayer money be used to cover losses associated with the failure of a large financial firm," according to the FDIC proposal. Under the proposal, secured creditors would only be protected to the extent of the fair value of the collateral they hold for that debt. The FDIC believes this rule would ensure market participants to use "highly liquid" and easily valued collateral. "Shareholders and unsecured creditors should understand that they, not taxpayers, are at risk," Bair said. "This [proposal] represents a significant narrowing of the discretion provided under Dodd-Frank for differentiation among creditors, consistent with the law's overarching public policy objective to maximize market discipline and make clear that all equity and unsecured debt holders are at risk." Write to Jon Prior. The author holds no relevant investments.