A new bill that would make it easier for financial institutions to declare bankruptcy passed in the House of Representatives on Monday, Dec. 1.
The Financial Institution Bankruptcy Act of 2014 would allow for banks and other financial institutions to voluntarily begin the process of bankruptcy, and in some cases, the Federal Reserve would be able to begin the process instead.
The bill allows for a holding company to go into bankruptcy while its subsidiaries, who would take over the assets, would stay out of the way.
The bill passed thanks to bipartisan support and sponsorship. Chief sponsors included Rep. Spencer Bachus (R-AL), House Judiciary Committee Chairman Bob Goodlatte (R-VA), and Ranking Member John Conyers (D-MI).
In a floor speech to colleagues, Conyers explained that the bill would have a positive economic impact throughout the country, as well. “This process will allow a failing financial institution to transfer its assets to a newly formed bridge company over a single weekend, which will promote confidence in the financial marketplace,” he said.
The bill serves as an effort to rewrite bankruptcy law as it applies to large U.S. banks and other financial institutions, such as insurance companies. Wall Street banks support the bill, but some critics say that it could favor those big banks too much and doesn’t prevent another taxpayer bailout in the future.
“The 2014 act is specifically designed for Financial Institutions, because of the unique role Banks play in the USA and Global economies, their failure cannot be tolerated,” says Will Ridings, Principal at Ridings Law Firm. “These large banks and financial institutions know that they are not held accountable. They pay out huge bonuses and salaries for taking risks and making profits, yet suffer no losses for poor business decisions. They are literally ‘Too Big To Fail’. Regardless of the 2014 act, taxpayers will still have to bailout any large banks because nobody can afford a collapse of them.”
Under the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2010, the Federal Deposit Insurance Corp. was given the authority to seize and dismantle financial institutions in order to prevent financial collapse on a wider scale. The proposed 2014 act would still let the FDIC take over a parent company but allow an institution’s subsidiaries to continue operating so long as they are able to.
The bill will move on to the Senate, which will experience a change in control this January when the Republicans take over. Prospects for the bill’s passing remain unclear at this time.
The legislation would also allow bankrupt firms some relief: trading partners would have to wait several days before canceling transactions with failing banks in order to reduce legal obligations for the bankrupt party.