WASHINGTON — The House Financial Services Committee approved 31 to 27 on Wednesday a bill that would give the Federal Reserve Board the power to oversee systemically important firms and allow the Federal Deposit Insurance Corp. to resolve them if they fail.
The legislation, which passed along party lines, is the last major chunk of the panel's regulatory reform package. House debate on the complete package, which includes other bills to create a consumer protection agency and regulate derivatives, is expected to begin next week.
The committee approved the bill despite the absence of members of the Congressional Black Caucus, who succeeded in delaying the vote before Thanksgiving. The caucus members cited lingering frustrations with the Obama administration, which they said did not give adequate consideration to how the recession is hitting poor and minority communities.
The committee's chairman, Barney Frank, said he hoped to have a robust debate on the complete package in the House and to consider several amendments starting Wednesday of next week, with final passage expected by Friday.
"I want a lot of debate. I want a lot of amendments and full debate. We have Wednesday, Thursday and Friday of next week scheduled," the Massachusetts Democrat told reporters after the vote.
In addition to the systemic-risk bill and a separate measure approved Wednesday to create an office of insurance information within the Treasury Department, the reform package the House plans to take up includes measures to regulate derivatives, establish a consumer protection agency, enhance investor protections and reform the credit rating agencies. It would also include previously passed bills to tighten subprime mortgage underwriting and tie executive compensation to performance to reduce incentives for excessive risk taking.
Frank said the overall effort is designed to ensure that bailouts are not repeated and that in the event of a major firm's collapse the system is insulated to allow its failure without shutting down the credit markets and crashing the economy.
"The package as a whole is this: to make it much less likely that there will be failures of institutions that have become so big and so indebted to so many people that their failure affects not only themselves but the whole economy," Frank said.
"If it happens, we will put them out of their misery, but we also do things to make it less likely that it will happen by beginning regulation of derivatives, by having a systemic-risk council that can tell institutions, 'You are now in trouble and you have to reduce your leverage and raise your capital; you have to sell off this institution.'"
The approval of the systemic-risk bill culminates several weeks of contentious partisan debate, during which the legislation underwent major changes.
It would create an interagency council to monitor and identify firms that pose a risk to the economy, and would give the Fed power to raise those firms' capital and leverage requirements.
The council would be able to force any systemically important firm to break up if it is deemed a threat because of its size or interconnectivity.
It would also allow the FDIC to unwind a systemically important firm, but the agency would not be able to give help to an open and operating large institution.
Another controversial provision would let the FDIC force secured creditors to take a 20% haircut in a resolution of a systemically important institution. The provision would effectively prevent the Federal Home Loan banks from offering advances to large banks and would significantly raise banks' cost of offering their own secured debt.
Frank said the amendment's sponsor, Rep. Brad Miller, D-N.C., was drafting a new amendment to change it, but Frank would not divulge details.
"It's being debated," he said. "I expect to see an amendment on that. I voted for it, but it was only 34 to 32. It was narrowly divided and Brad Miller is really talking to a lot of people about that."
