News for Credit Professionals       NACM-SE

House Committee Votes to Repeal Dodd-Frank Liquidation Authority

A House panel approved legislation yesterday that would rescind the federal government’s authority to unwind failing financial institutions.

In a 31-26 vote, the House Financial Services Committee voted to repeal Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which grants regulators the authority to wind-down faltering firms in the interest of protecting the broader economy. The measure was included as part of bill designed to cut the deficit by $35 billion.

Republicans, including Financial Services Committee Chairman Spencer Bachus (R-AL), have long considered Title II a provision that institutionalizes bailouts. In addition to rolling back several other portions of the Dodd-Frank Act, the bill approved by the committee would repeal the Federal Deposit Insurance Corporation’s (FDIC’s) authority to lend to a failing firm, purchase the assets of a failing firm and guarantee the obligations of a failing firm. It would also eliminate the FDIC’s authority to borrow up to a percentage of the book value of a failed firm’s total consolidated assets in the days following its appointment as receiver.

As far as the repeal of Title II’s effect on the federal budget, Bachus cited a Congressional Budget Office (CBO) report which pegged the proposal’s savings at $22 billion over 10 years. Democrats countered, however, that as designed, Title II would eventually recoup any money borrowed from the taxpayer, typically by assessing fees on larger financial institutions.

In a letter prior to the committee’s vote, Treasury Secretary Tim Geithner urged Chairman Bachus to rethink his attempts to reduce the nation’s deficit by essentially gutting the Dodd-Frank Act, arguing that any budget savings would be erased by the costs of future crises. “Title II…prohibits the government from bailing out failing financial institutions, provides authority to break up or unwind those institutions and ensures that major financial institutions, rather than the taxpayer, bear the costs of future financial crises,” said Geithner. “By eliminating this authority, this provision would critically undermine the government’s ability to limit the damage to the economy in the event on future financial crises.”

“This provision was carefully designed to have no cost to the taxpayer over the long run,” he added. “Eliminating this provision would increase the risk that future financial crises would increase future deficits.”

Despite the committee’s approval of the bill, it has little chance of passing the Democratically-controlled Senate. Nonetheless, it could serve as a blueprint for future Republican attempts to undo the Dodd-Frank Act should the party retake the Senate or the White House, or both, in November.

Jacob Barron, CICP, NACM staff writer