A Federal Reserve official went out of his way Wednesday to rebut Republican criticisms of the new financial regulations, by saying the central bank has made progress toward ending the problem of “too big to fail” banks.
Republicans have argued that bankruptcy is the best option for banks, instead of having the government wind them down, and have also said the Dodd-Frank financial reform law enshrines the problem of too-big-to-fail banks because they can be saved by the government if they fail.
But in a speech in Stockholm, Fed Vice Chairman Stanley Fischer said bankruptcy is not enough, because the bankruptcy code “does not direct the judge to take financial stability into account in making decisions.” In other words, bankruptcy might not work for a big bank that could threaten the entire economy by failing, a possibility that isn’t considered in most bankruptcy proceedings.
The resolution authority in Dodd-Frank, he added, does not constitute a bailout, because taxpayers would not forced to aid failing banks. Instead, regulators are requiring banks to overhaul their ownership structures so that shareholders would suffer losses and creditors would be put on the hook in case of a failure.
In case that effort failed, Fischer noted, losses borne by the government would be recouped through a levy on other big banks, ensuring that the costs of the rescue “would not be passed on to taxpayers.”
House Republicans have unveiled replacement legislation for Dodd-Frank that would substitute a reformed bankruptcy code with special provisions for banks for the 2010 law’s resolution authority.
Jeb Hensarling, the head of the Financial Services Committee, has boasted that the legislation guarantees “bank bailouts for none.” Republicans also want to overhaul the bankruptcy code through the annual appropriations process.
Although those legislative efforts are not likely to become law this year, they sketch out a future agenda for a potential Republican president working with Congress.
