US bank watchdogs should retain the ability to dismantle massive, complex financial firms after a collapse, but should ensure the power is reserved “as an emergency tool for use under only extraordinary circumstances,’’ the Treasury Department said in a report released Wednesday.
The Trump administration’s disdain for the so-called Orderly Liquidation Authority granted to regulators after the 2008 financial crisis is clearly reflected in the report, which cites “serious defects’’ in the Dodd-Frank Act measure. The report urges lawmakers to focus instead on reforming US bankruptcy laws to accommodate megabanks, a long-touted idea that has failed to clear Congress.
The new document is the latest in a series of Treasury reports prompted by President Trump’s call for a review of financial rules with an eye to cutting red tape and spurring economic growth. The reports aren’t orders themselves, but are meant to guide the independent agencies that would have to create or roll back rules.
Dodd-Frank gave the Federal Deposit Insurance Corp. — with coordination from the Federal Reserve and the Treasury — authority to resolve complex financial firms in ways similar to its resolution of deposit-taking banks.
With OLA, the idea is to convert them into healthy new firms as quickly as possible so that they can continue to do business uninterrupted. Regulators’ ability under the rule to temporarily use Treasury funds to cover losses has led some Republican lawmakers to identify it as a bailout authority and seek its repeal.
Revisions suggested in the Treasury report include narrowing the FDIC’s powers, eliminating tax benefits for the so-called bridge companies created by regulators, and demanding tighter restrictions on using Treasury funds.
That wasn’t enough to satisfy House Financial Services Committee Chairman Jeb Hensarling, who has been the loudest critic of the liquidation power.
“Although I have been pleased or even excited about Treasury’s previous reports, this one disappoints,’’ the Texas Republican said in a statement, arguing that keeping OLA goes against Trump’s call to end to prevent taxpayer bailouts. “On its face, this is inconsistent with the President’s core principle.’’
Key regulators, including Federal Reserve Chair Jerome Powell, have long opposed getting rid of the wind-down authority. Another roadblock is that overseas regulators do not trust the US bankruptcy courts to deal with resolution of global financial institutions.
“Without the assurance of OLA as an emergency tool, foreign regulators would be more likely to impose immediate new requirements on foreign affiliates of US bank holding companies, raising their costs of business, and harming their ability to compete internationally,’’ the report said.
The new report acknowledged the same concern regulators had during the Obama administration: that the bankruptcy system, though a preferred way of handling company failures, still may not be equipped to handle the collapse of a megabank.
“The current bankruptcy code was not designed to address the financial distress of a debtor engaged in activities such as significant derivatives transactions and short-term lending,’’ it said.
Marcus Stanley, policy director for Americans for Financial Reform, said he was glad to see the authority embraced in the report, but alarmed by specifics of the bankruptcy recommendations that he said “would create special privileges for big banks, rely on unrealistic assumptions, and in their current form would likely increase risks to the financial system.’’
