House Committee Approves Amendment to Bankruptcy Code for Large Banks

The House Judiciary Committee approved bipartisan legislation that is aimed at speeding up the bankruptcy process and preventing taxpayers from taking the hit in the event of the failure of large financial institutions.

The law, known as H.R. 5421 or the Financial Institution Bankruptcy Act of 2014, was approved by a voice vote on September 10. Under the new law, a subchapter added to chapter 11 of the bankruptcy code requires large financial institutions to maintain transparency and creditor priority. The bill was praised by democrats and republicans alike, including House Judiciary Committee Chairman Bob Goodlatte (R-Virginia), ranking member John Conyers (D-Michigan) and Regulatory Reform Subcommittee Chairman Spencer Bachus (R-Alabama).

“We strongly support the committee’s passage of the bipartisan Financial Institution Bankruptcy Act today," Goodlatte, Conyers, and Bachus said in a joint statement. "This bill was carefully calibrated to strengthen our nation’s bankruptcy laws and to ensure that the bankruptcy process is well equipped to resolve companies of all operations and sizes. This legislation enhances the Bankruptcy Code and its ability to resolve financial institutions in an efficient and value-maximizing manner for the benefit of the U.S. and global economies, employees, creditors, and customers.”

Detractors of the new bill defend the Orderly Liquidation Authority, or OLA, which was the system set up by the Dodd-Frank Reform Act in 2010 to mitigate the risk of large financial firms that are failing. Supporters of the Financial Institution Bankruptcy Act believe it is superior to OLA, arguing that OLA gives too much power to regulators and politicians in the case of a failing bank and as a result, taxpayers would lose billions. OLA supporters say that it provides the necessary flexibility to quickly provide aid to big bank creditors to stop a crisis, and that assessments placed on big banks after the crisis abates would cover any taxpayer money used.

The backers of the Financial Institution Bankruptcy Act say it will expedite the bankruptcy process with a speedy judicial review and quicker transfer of assets from the bank to a bridge company that will attempt to save the institution without affecting the business's operations. The committee's goal by passing the new legislation is to prevent a repeat of the lengthy and costly Lehman Brothers bankruptcy, which was filed in 2008 and is just now being completed.