The Battle over Bankruptcy Alternatives to Dodd-Frank Isn't Going Away

American Banker, December 4, 2014 | Go to article overview

The Battle over Bankruptcy Alternatives to Dodd-Frank Isn't Going Away


Byline: Victoria Finkle

WASHINGTON -- The House passed an enhanced bankruptcy bill for large banks earlier this week, teeing up what's likely to be a broader -- and more contentious -- debate over the issue next year.

Lawmakers approved the Financial Institutional Bankruptcy Act on Monday by voice vote, but the Senate is not expected to take up the measure in the waning days of the lame duck session.

Still, the issue is likely to remain on the radar for Congress, though it may get swept up into larger fights about changes to the Dodd-Frank Act and related concerns next year.

"The debate isn't just going to be about the technical proceedings of bankruptcy," said Brandon Barford, a partner at Beacon Policy Advisors. "Rather than just being a relatively short and technical judiciary matter, it will bleed into at least two or three larger policy debates."

The House bill won broad support from both sides of the aisle -- in part because it proposed ways to improve bankruptcy proceedings for large financial institutions while sidestepping any changes to Dodd-Frank's so-called orderly liquidation authority. The OLA, laid out in Title II of the financial reform law, is a process for unwinding complex financial institutions, with the Federal Deposit Insurance Corp. acting as the receiver.

Many conservatives remain opposed to the OLA framework, warning that the process isn't designed to be transparent and gives regulators too much discretion compared to a more straightforward bankruptcy process. Moreover, lawmakers on both sides of the aisle are still concerned that Dodd-Frank hasn't solved "too big to fail."

The House bill didn't attempt to rework the OLA framework, instead focusing on how to improve the bankruptcy process for large institutions. That helped it win support from Democrats, but it's unclear if proponents of the bill will take the same approach next year.

Republicans are set to take control of the Senate in January and strengthen their majority in the House, setting the stage for sharper debate over broader financial reform issues, including changes to Dodd-Frank.

The GOP is also expected to take a closer look at concerns about the Federal Reserve's transparency and the discretion given to the Financial Stability Oversight Council, which could provide further opportunities for discussion about the bankruptcy code and how to wind down major banks and systemically important institutions in crisis.

Still, while House lawmakers will have to move the bill again in the new Congress, the vote on Monday night represents a key milestone for the effort, observers said.

"I do see this as a sign that it's something Congress will come back to next year," said Mark Calabria, director of financial regulation studies at the Cato Institute and a former top GOP Senate aide.

The enhanced bankruptcy provisions are designed to provide regulators with additional options for winding down distressed institutions, but the devil remains in the details for how that process would take shape.

"The issue is a lot more complicated than when folks draw parallels between regular corporate bankruptcy and how you use it for financial company that's very broad in scope," said James Ballentine, executive vice president of congressional relations and political affairs at the American Bankers Association. …

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