Legislation Creeps Forward for Bankrupt Banks

Unlike other topics in Congress, there have been a few steps forward in legislation that governs rules about big failing banks that are forced to enter into bankruptcy proceedings following the financial crisis.

Rewriting Bankruptcy Law

On Monday the House passed bipartisan legislation that will rewrite bankruptcy law that applies to big U.S. banks as well as other financial firms, such as insurance companies. The new legislation is supported by Wall Street banks, but critics feel it favors big banks over their trading partners and does little to prevent other future bailouts of big banks by taxpayers.  But prospects for the legislation’s passing in the Senate aren’t clear now that control has flipped from the Democrats to the Republicans.

2010 Overhaul

The 2010 law that was enacted as an overhaul of previous laws gave the Federal Deposit Insurance Corp. (FDIC) authority to seize as well as dismantle any big bank or financial firm capable of collapsing and threatening the broader system.

New Legislation

If the new legislation passes, the FDIC is still able to take over a failing firm’s parent company. But any healthy subsidiaries of that company will be able to continue any operations.  Additionally, the legislation would be able to provide relief to banks or financial firms in bankruptcy of some of the legal obligations to holds to other banks and its trading partners. And the partner banks and companies would be forced to wait several days prior to canceling some financial transactions. Chief sponsors of the bill, Reps. Bob Goodlatte (Virginia), Spencer Bachus (Alabama), and Dem. John Coyers (Michigan), say the bill “removes potential obstacles to an efficient bankruptcy of a financial institution.”

Source: ABC News, House Passes Rules for Big Banks in Bankruptcy, December 1, 2014