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The House approved a bill late Monday that would set up a framework for large failing banks to go through the bankruptcy process.
December 2
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. "I think the debate will evolve slowly and it will come in the larger context of what can and cannot work around Title II and other aspects of Dodd-Frank."
One big concern is whether the Senate will take up the issue more vigorously next term, amidst other priorities.
Sens. John Cornyn, R-Texas, and Pat Toomey, R-Pa., introduced more controversial legislation last year to improve the bankruptcy code for financial institutions, which included a repeal of OLA. That bill didn't move in the Democratically-controlled Senate, and isn't likely to gain traction even under GOP rule because Republicans will still need several Democrats on board to avoid a filibuster.
The White House also would almost assuredly veto a bill that removed a cornerstone of its landmark financial reform law. Some Democrats could be open to certain tweaks to the OLA process, but not outright repeal.
Part of the problem for both chambers has to do with jurisdiction and the difficulties that come from having multiple committees involved on an issue. The judiciary panels in the House and Senate have control over the bankruptcy code, not the banking committees. The bill that passed the House this week, for example, came out of the House Judiciary Committee.
"I do think one of the reasons the bankruptcy code wasn't changed in Dodd-Frank was the desire to minimize involvement of the judiciary committees this is the flip side of that," said Calabria. "But for this to be a truly effective vehicle, you have to think about how it replaces or melds with Dodd-Frank."
The Financial Services Committee has already played some role in the House bill, due in part to Rep. Spencer Bachus, R-Ala., who was a core sponsor of the measure as a senior member of the Judiciary Committee in addition to being the former chairman of the banking panel. But he's retiring at the end of the year, and observers said more involvement from the banking panel may be needed down the line.
A spokeswoman for Rep. Bob Goodlatte, R-Va., chairman of the judiciary panel, declined to comment on whether he would take up the issue again next year, saying a committee agenda hasn't been finalized yet. She did say that the panel "worked very closely" with the Financial Services Committee on the legislation that passed, and that she would expect that coordination to continue.
Over in the Senate, Sen. Chuck Grassley, R-Iowa, is expected to take over the Judiciary Committee. He's been a vocal critic of banks, and could potentially be inclined to take up the bankruptcy issue, observers said. A spokeswoman said the senator hasn't set an agenda yet for next year.
Sen. Richard Shelby, R-Ala., who will resume the gavel on the Banking Committee, has previously raised concerns about the Dodd-Frank resolution authority and would likely take a keen interest in any bankruptcy discussions, some noted. A spokeswoman said the lawmaker hasn't yet commented on which issues he'd pursue next year.
Meanwhile, Rep. Jeb Hensarling, R-Texas, chairman of the Financial Services Committee, has also taken a keen interest in replacing OLA with a bankruptcy alternative in the past.
"Ending too big to fail is a priority for the chairman and the committee," said a banking panel spokesman.
