Corporate Finance

House Passes Bill to Reform Bank Bankruptcies

The Financial Institution Bankruptcy Act of 2014, sponsors say, would make the bankruptcy of a financial institution more efficient and prevent bai...
Matthew HellerDecember 4, 2014

A bankruptcy reform bill supported by big banks and their regulators has been approved by the House of Representatives but the Wall Street Journal questioned whether it would prevent taxpayer bailouts of financial institutions.

The Financial Institution Bankruptcy Act of 2014 creates a new section of the bankruptcy code for failing banks, allowing them to employ the traditional bankruptcy process rather than the alternative Orderly Liquidation Authority (OLA) system set up by the post-crisis Dodd-Frank Act.

“FIBA removes potential obstacles to an efficient bankruptcy of a financial institution,” House Judiciary Committee Chair Bob Goodlatte, a Virginia Republican, said after the House passed the bill on a voice vote. “This legislation enhances the bankruptcy code and its ability to resolve financial firms for the benefit of stability in the U.S. and global economies and does so with minimal financial burdens or cost.”

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As TheStreet reports, critics of the OLA say it would give regulators and politicians too much discretion to pick winners and losers among junior and senior creditors when a failing institution is dismantled. They are also concerned that taxpayer funds spent through the OLA process would never be recouped even though there is a provision in the law requiring those costs to later be covered by a fee assessed on big banks.

TheStreet pointed out, however, that prospects for passage of FIBA in the Senate are unclear and any move to repeal the OLA system would likely be vetoed by President Barack Obama.

The Wall Street Journal, meanwhile, said bankruptcy courts would be better for resolving failing giants but if the purpose of the FIBA “is to take power from bureaucrats and give it back to markets and judges, it’s odd that not only the failing firm but also the Federal Reserve Board of Governors can trigger the bankruptcy filing if ‘necessary to prevent serious adverse effects on financial stability in the United States.’”

“The GOP should try again next year with a reform that begins with a larger Dodd-Frank rewrite and includes a prohibition on taxpayer bailouts,” the Journal recommended.

Sources: The Street, Wall Street Journal

Featured image: Thinkstock

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