The Treasury Department proposed Wednesday to overhaul the mechanism for rescuing big banks created by President Obama’s financial reform law, and to institute a new chapter of the bankruptcy code specifically for major banks.
The proposal, a 57-page report ordered by President Trump last April, would stop short of fully repealing the Dodd-Frank provision allowing the Federal Deposit Insurance Corporation to take over a failing big bank and reorganize it using federal funds. Some congressional Republicans have called for that, arguing the provision amounts to a guaranteed bailout for Wall Street.
Instead of repeal, the Treasury recommends retaining and reforming that authority, known as Orderly Liquidation Authority, as an “emergency tool” to be used during a crisis for one or more big banks that could bring down the entire financial system. The report calls for new guardrails on the process that it says would make it less likely to amount to a bailout for investors or create confusion during a crisis.
The report also calls for the creating “Chapter 14” bankruptcy for banks, on the grounds that the bankruptcy process is a fairer and more predictable tool for settling out claims among interests in a failed bank.
Congressional Republicans, including Sen. Pat Toomey of Pennsylvania, have pushed the idea of bank bankruptcy for years, and the idea has support from conservative thinkers at the Hoover Institution and elsewhere. For it to work, the code would need to be revamped to allow for the speedy transfer of bank operations to a functional bridge company to prevent runs by depositors, the Treasury report concludes. There would also need to be a delay on the settling of financial contracts, such as derivatives, to prevent bank counterparties from calling in debts while the bank is being reorganized.
The proposals would amount to a major rewrite of the Dodd-Frank financial reform law. The Treasury doesn’t go quite as far as House Republicans, who voted last year to repeal Orderly Liquidation Authority outright and replace it with bankruptcy, but it would rework one of the major provisions of Dodd-Frank meant to prevent the failure of a big bank from causing panic and generating another crisis.
Financial Services chairman Jeb Hensarling, the author of the House legislation, said Wednesday that the Treasury report “disappoints” because it doesn’t call for repealing the authority.
“Dodd-Frank’s Orderly Liquidation Authority expressly enables taxpayer funded bailouts; it does not prevent them,” the Texan said in a statement. “It is therefore difficult to square today’s report with the President’s clear guidance on this issue.”
The major parts of the plan would also require legislation from Congress. So far, Senate Republicans haven’t been able to move major financial regulatory bills with their slim majority.
Nevertheless, the report argues an overhaul is needed because the current regime “creates a resolution authority that confers far too much unchecked administrative discretion, could be misused to bail out creditors, and runs the risk of weakening market discipline.”
