WASHINGTON Republican lawmakers continued their assault Wednesday on a portion of the Dodd-Frank Act that grants the Federal Deposit Insurance Corp. the ability to seize and unwind a failing banking company, arguing that reforming the bankruptcy code is a better way to tackle "too big to fail."
Sen. Pat Toomey, R-R.I., and Sen. John Cornyn, R-Texas, introduced a bill last week that would eliminate the FDIC's "orderly liquidation authority" and instead make changes to the bankruptcy process for large and complex financial institutions.
"Among its many flaws, Dodd-Frank creates a mechanism to bail out financial firms and in the process essentially codifies the 'too big to fail' problem," Toomey said during a hearing Wednesday on the bill in a Senate financial institutions subcommittee.
Dodd-Frank created two ways to facilitate the resolution of a systemically important financial institution. Under Title I, banks are required to streamline their business and create "living wills" that map out how they can be broken up under the bankruptcy code if they were to become insolvent. But Title II gives regulators an escape route if the failure of a banking company is likely to pose a threat to the economy. Using OLA, the FDIC is empowered to seize and unwind a bank. The agency has suggested one way it could do this, by using a "single point of entry" to create a bridge holding company to run the firm and its subsidiaries while it is unwound.
But Toomey said that such powers give the FDIC "almost limitless discretion for the liquidation" of holding companies. He argued that his bill would provide "an opportunity for restructuring which should be an option available to a failing institution."
He also called into question the FDIC's expertise in running a large and complex bank, saying political motives could come into play.
"The FDIC has unlimited discretion how to treat comparably situated creditors and I think that is completely inconsistent with bankruptcy," Toomey said.
However, the Dodd-Frank Act is written so that in the case of a resolution under Title II, creditors would be treated as they would be under the normal bankruptcy code and that similarly situated creditors would be treated the same way. It does allow for the FDIC in limited circumstances to make payment determinations to certain creditors to stabilize key operations.
But Toomey still contended that an institution's access to credit could dry up even faster because creditors might fear they will end up getting the "short end of the stick."
Yet Sen. Elizabeth Warren, D-Mass., defended the resolution powers for the FDIC, saying they were important in ending "too big to fail."
"The question is realistically how do you get there and for me that is why things like the living wills are so important and intersect powerfully here," she said.
The FDIC's powers under Title II of Dodd-Frank are also designed to be similar to what it already does for individual banks. Several times in its history, the FDIC has seized and run a bank while it decided how to sell or dispose of the institution's assets, including in 2008 when it successfully operated $32 billion-asset IndyMac for several months.
Warren said that ultimately she and Toomey had the same goal in mind in ending taxpayer bailouts.
"We are trying to get to the same place," she said.
Sen. Jeff Merkley, D-Ore., also supported the FDIC's new powers.
"While reforming the bankruptcy code alone may be useful, I am not sure that bankruptcy alone would be a enough to successfully resolve a complex, interconnected financial institution without disrupting financial stability and the global economy and certainly that was the purpose of Title II," he said.
Republicans have long tried to reform the bankruptcy code, including during the debate over what became Dodd-Frank. More recently, the House passed a bill last year that would expand the bankruptcy code and is considering a similar bill this session.
Toomey and Cornyn proposed a bill two years ago, and the latest legislation is a revision of that earlier effort.