House Judiciary on the Financial Institution Bankruptcy Act
House Judiciary Committee
Subcommittee on Regulatory Reform, Commercial and Antitrust Law
“The Financial Institution Bankruptcy Act of 2015”
Thursday, July 9, 2015
Key Topics & Takeaways
- Lender of Last Resort: Ranking Member Hank Johnson (D-Ga.) asked if Subchapter V can be effective without an explicit lender of last resort function for the federal government. Levin replied that it is possible because banks are far better capitalized, but that the market is less likely to run if a liquidity facility exists and people feel protected.
- Title II: Ranking Member Johnson cautioned against combining the proposed bill with efforts to strike Title II of Dodd-Frank, explaining that the ability of regulators to assume full control of the resolution process is “an essential insurance policy against systemic risk” and that Title II serves as a backstop to the bankruptcy process.
- Involuntary Bankruptcy: Rep. John Ratcliffe (R-Texas) expressed concern about allowing the Federal Reserve to initiate a bankruptcy proceeding against a firm’s will. Bernstein doubted that the Fed would ever use this power because just the threat that it could employ it would encourage firms’ management to be more cautious. He said the provision is “really only a failsafe for a situation where company management is paralyzed.”
Witnesses
- Donald Bernstein Esq., Davis Polk & Wardwell LLP
- Stephen Hessler Esq., Kirkland & Ellis LLP
- Richard Levin Esq., Jenner & Block LLP
Opening Statements
In his opening statement, Chairman Tom Marino (R-Pa.) noted that H.R. 2947, the Financial Institution Bankruptcy Act of 2015, was also considered last Congress and was passed by the Committee and the House of Representatives. He said last year’s work is now being built upon with further examination. Marino stated that the Dodd-Frank Act was intended in part to address the failures of too-big-to-fail firms, but that it failed to amend the bankruptcy code for the unique situation of major financial institutions. He credited the proposed legislation for accomplishing just that, and stressed that bankruptcy, and not Title II of Dodd-Frank, is the preferred method of resolution because it is grounded in the principles of due process and rule of law.
In his opening statement, Ranking Member Hank Johnson (D-Ga.) acknowledged the necessity of an accelerated bankruptcy process. He said meeting liquidity needs to save a failing firm is difficult and that the lack of a funding mechanism for a firm’s reorganization is a concern that should be reviewed, but that he is confident Chairman Marino will work to accommodate this concern. He cautioned against combining the proposed bill with efforts to strike Title II of Dodd-Frank, explaining that the ability of regulators to assume full control of the resolution process is “an essential insurance policy against systemic risk” and that Title II serves as a backstop to the bankruptcy process.
Rep. Bob Goodlatte (R-Va.) highlighted the financial system as the “lifeblood” of U.S. job creation, but said the crisis showed that the existing system was not prepared for the resolution of major financial institutions. While noting that there has been significant debate on whether Dodd-Frank is adequate to respond to future crisis, he stated that the Financial Institution Bankruptcy Act should not be considered a part of that debate. He said the bill provides transparency and predictability and incorporates the single point of entry (SPOE) approach to resolution, which many believe to be the easiest and most feasible method. The bill is the result, he concluded, of the cooperation and combination of ideas from the financial, legal, and regulatory community.
Rep. Dave Trott (R-Mich.), who introduced the bill, said economic well-being relies on the health of financial institutions. He stated that amending the Chapter 11 process would reduce risks to economic stability and the need for a taxpayer bailout through its “equitable and predictable process.”
Rep. John Conyers, Jr. (D-Mich.) stated that he supports the bill because it would help to expeditiously restore trust in the financial system after the collapse of a major financial institution. He was supportive of provisions allowing the Federal Reserve to force an institution into bankruptcy proceedings, and of the creation of bridge companies to continue the operations of distressed firms. He stressed that bankruptcy law has enabled many of the largest companies to regain their financial footing, but that it must be amended in order to be a truly viable alternative to Title II for major financial institutions.
Conyers said the proposal is an “excellent bill” but was disappointed that it did not include any provision that allowed the federal government to serve as a lender of last resort, though he noted that this would be outside the Committee’s jurisdiction.
Testimony
Donald Bernstein Esq. – Davis Polk & Wardwell LLP
In his testimony, Donald Bernstein Esq., Davis Polk & Wardwell LLP, highlighted significant changes in the structures of financial institutions, noting that capital levels have “essentially doubled” since 2008 and that the coming total loss-absorbing capacity (TLAC) proposal will double capital again and permit the effective use of SPOE and bankruptcy to resolve firms. He also stated that banks’ higher liquidity levels today would allow them to resolve themselves.
Bernstein supported the bill as a whole, but questioned the need for a provision allowed the Federal Reserve to commence an involuntary bankruptcy proceeding.
Stephen Hessler Esq. – Kirkland & Ellis LLP
In his testimony, Stephen Hessler Esq., Kirkland & Ellis LLP, noted that he testified in support of the legislation at a hearing last year, and stressed the comparative benefits of a judicial process for resolution as opposed to a regulatory process. He explained that bankruptcy provides clear and established rules administered through a transparent tribunal, and that the bill would make it far less likely that Title II of Dodd-Frank would ever be used.
Richard Levin Esq. – Jenner & Block LLP
In his testimony, Richard Levin Esq., Jenner & Block LLP, said he agreed with much of what Bernstein and Hessler had said. He said structures and rules put in place since the crisis make the bill much more workable than it would be been in 2009, but he highlighted three concerns: 1) bankruptcy courts lack the expertise of regulators that is needed to take over and resolve a major financial institutions, so regulators should continue to play a major role in the process; 2) foreign regulators would be much more comfortable working with U.S. regulators already familiar to them than with unknown bankruptcy judges; and 3) involuntary bankruptcy proceedings are not necessary and time constraints do not allow for a meaningful defense by a firm.
Question and Answer
Marino asked if major financial institutions today have enough liquidity to fund a resolution process without requiring federal assistance. Bernstein answered that banks have used severe stress testing models in a resolution context to show that they have enough liquidity. However, he suggested that while a liquidity backstop from the federal government may not be used, its presence alone could help to facilitate an orderly resolution by giving the market more confidence.
Johnson asked if Subchapter V can be effective without an explicit lender of last resort function for the federal government. Levin replied that it is possible because banks are far better capitalized, and that the market is less likely to run if a liquidity facility exists and people feel protected.
Conyers asked how Levin would respond to those who say the lender of last resort function amounts to a taxpayer-funded bailout. Levin answered that lender of last resort is not a bailout because of its very nature, in that it requires lending against good collateral and the imposition of punitive interest rates.
Bankruptcy Process
Marino asked what could be done to ensure that the “subjective findings” of judges are consistent. Levin agreed that many decisions are discretionary and subjective, and so involving regulators in the bankruptcy process would be helpful in achieving the best result because they have begun adopting regulations for how a resolution should work.
Conyers asked how the Lehman Brothers failure would have been different hds Subchapter V been in existence at the time. Berstein said Subchapter V, in addition to higher capital and liquidity requirements, could have encouraged Lehman brothers to be structured in a different way that would be more conducive to effective resolution.
Trott asked Levin why he has more confidence in regulators than bankruptcy judges. Levin explained that regulators have “learned a lot” in recent years and are in a much better position to deal with a resolution situation than before the crisis. He reiterated that combining the regulators’ knowledge of systemic risks with the bankruptcy expertise of judges would yield the best result.
Johnson noted that the National Bankruptcy Conference stated that that any amendments to the bankruptcy code should make it clear that it retains Title II authorities under the Dodd-Frank Act. Levin said the proposed bill does not affect Title II, but that the proposed Subchapter V would address most of the problems Title II is designed to solve and so it is “hard to imagine” Title II being needed in the future.
Rep. John Ratcliffe (R-Texas) said that while he would like to repeal Dodd-Frank completely, he would like to at least move forward with solving some of its challenges, including Title II. He asked if the bill reduces the need for Title II, to which Hessler replied that the availability of Subchapter V would “effectively render Title II unnecessary.”
Involuntary Bankruptcy Proceedings
Conyers asked why the NBC does not state that regulators should have the authority to commence an involuntary Subchapter V proceeding. Levin explained that even under an involuntary petition, a firm would have to be given a chance for a defense, but time constraints would not allow for a meaningful defense and would undercut due process.
Ratcliffe expressed concern with allowing the Federal Reserve to initiate a bankruptcy proceeding against a firm’s will. Bernstein doubted that the Fed would ever use this power because just the threat that it could employ it would encourage firms’ management to be more cautious. He said the provision is “really only a failsafe for a situation where company management is paralyzed.” He stressed that the constant dialogue between institutions and regulators makes this provision unnecessary.
For more information on this hearing, please click here.
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House Judiciary Committee
Subcommittee on Regulatory Reform, Commercial and Antitrust Law
“The Financial Institution Bankruptcy Act of 2015”
Thursday, July 9, 2015
Key Topics & Takeaways
- Lender of Last Resort: Ranking Member Hank Johnson (D-Ga.) asked if Subchapter V can be effective without an explicit lender of last resort function for the federal government. Levin replied that it is possible because banks are far better capitalized, but that the market is less likely to run if a liquidity facility exists and people feel protected.
- Title II: Ranking Member Johnson cautioned against combining the proposed bill with efforts to strike Title II of Dodd-Frank, explaining that the ability of regulators to assume full control of the resolution process is “an essential insurance policy against systemic risk” and that Title II serves as a backstop to the bankruptcy process.
- Involuntary Bankruptcy: Rep. John Ratcliffe (R-Texas) expressed concern about allowing the Federal Reserve to initiate a bankruptcy proceeding against a firm’s will. Bernstein doubted that the Fed would ever use this power because just the threat that it could employ it would encourage firms’ management to be more cautious. He said the provision is “really only a failsafe for a situation where company management is paralyzed.”
Witnesses
- Donald Bernstein Esq., Davis Polk & Wardwell LLP
- Stephen Hessler Esq., Kirkland & Ellis LLP
- Richard Levin Esq., Jenner & Block LLP
Opening Statements
In his opening statement, Chairman Tom Marino (R-Pa.) noted that H.R. 2947, the Financial Institution Bankruptcy Act of 2015, was also considered last Congress and was passed by the Committee and the House of Representatives. He said last year’s work is now being built upon with further examination. Marino stated that the Dodd-Frank Act was intended in part to address the failures of too-big-to-fail firms, but that it failed to amend the bankruptcy code for the unique situation of major financial institutions. He credited the proposed legislation for accomplishing just that, and stressed that bankruptcy, and not Title II of Dodd-Frank, is the preferred method of resolution because it is grounded in the principles of due process and rule of law.
In his opening statement, Ranking Member Hank Johnson (D-Ga.) acknowledged the necessity of an accelerated bankruptcy process. He said meeting liquidity needs to save a failing firm is difficult and that the lack of a funding mechanism for a firm’s reorganization is a concern that should be reviewed, but that he is confident Chairman Marino will work to accommodate this concern. He cautioned against combining the proposed bill with efforts to strike Title II of Dodd-Frank, explaining that the ability of regulators to assume full control of the resolution process is “an essential insurance policy against systemic risk” and that Title II serves as a backstop to the bankruptcy process.
Rep. Bob Goodlatte (R-Va.) highlighted the financial system as the “lifeblood” of U.S. job creation, but said the crisis showed that the existing system was not prepared for the resolution of major financial institutions. While noting that there has been significant debate on whether Dodd-Frank is adequate to respond to future crisis, he stated that the Financial Institution Bankruptcy Act should not be considered a part of that debate. He said the bill provides transparency and predictability and incorporates the single point of entry (SPOE) approach to resolution, which many believe to be the easiest and most feasible method. The bill is the result, he concluded, of the cooperation and combination of ideas from the financial, legal, and regulatory community.
Rep. Dave Trott (R-Mich.), who introduced the bill, said economic well-being relies on the health of financial institutions. He stated that amending the Chapter 11 process would reduce risks to economic stability and the need for a taxpayer bailout through its “equitable and predictable process.”
Rep. John Conyers, Jr. (D-Mich.) stated that he supports the bill because it would help to expeditiously restore trust in the financial system after the collapse of a major financial institution. He was supportive of provisions allowing the Federal Reserve to force an institution into bankruptcy proceedings, and of the creation of bridge companies to continue the operations of distressed firms. He stressed that bankruptcy law has enabled many of the largest companies to regain their financial footing, but that it must be amended in order to be a truly viable alternative to Title II for major financial institutions.
Conyers said the proposal is an “excellent bill” but was disappointed that it did not include any provision that allowed the federal government to serve as a lender of last resort, though he noted that this would be outside the Committee’s jurisdiction.
Testimony
Donald Bernstein Esq. – Davis Polk & Wardwell LLP
In his testimony, Donald Bernstein Esq., Davis Polk & Wardwell LLP, highlighted significant changes in the structures of financial institutions, noting that capital levels have “essentially doubled” since 2008 and that the coming total loss-absorbing capacity (TLAC) proposal will double capital again and permit the effective use of SPOE and bankruptcy to resolve firms. He also stated that banks’ higher liquidity levels today would allow them to resolve themselves.
Bernstein supported the bill as a whole, but questioned the need for a provision allowed the Federal Reserve to commence an involuntary bankruptcy proceeding.
Stephen Hessler Esq. – Kirkland & Ellis LLP
In his testimony, Stephen Hessler Esq., Kirkland & Ellis LLP, noted that he testified in support of the legislation at a hearing last year, and stressed the comparative benefits of a judicial process for resolution as opposed to a regulatory process. He explained that bankruptcy provides clear and established rules administered through a transparent tribunal, and that the bill would make it far less likely that Title II of Dodd-Frank would ever be used.
Richard Levin Esq. – Jenner & Block LLP
In his testimony, Richard Levin Esq., Jenner & Block LLP, said he agreed with much of what Bernstein and Hessler had said. He said structures and rules put in place since the crisis make the bill much more workable than it would be been in 2009, but he highlighted three concerns: 1) bankruptcy courts lack the expertise of regulators that is needed to take over and resolve a major financial institutions, so regulators should continue to play a major role in the process; 2) foreign regulators would be much more comfortable working with U.S. regulators already familiar to them than with unknown bankruptcy judges; and 3) involuntary bankruptcy proceedings are not necessary and time constraints do not allow for a meaningful defense by a firm.
Question and Answer
Marino asked if major financial institutions today have enough liquidity to fund a resolution process without requiring federal assistance. Bernstein answered that banks have used severe stress testing models in a resolution context to show that they have enough liquidity. However, he suggested that while a liquidity backstop from the federal government may not be used, its presence alone could help to facilitate an orderly resolution by giving the market more confidence.
Johnson asked if Subchapter V can be effective without an explicit lender of last resort function for the federal government. Levin replied that it is possible because banks are far better capitalized, and that the market is less likely to run if a liquidity facility exists and people feel protected.
Conyers asked how Levin would respond to those who say the lender of last resort function amounts to a taxpayer-funded bailout. Levin answered that lender of last resort is not a bailout because of its very nature, in that it requires lending against good collateral and the imposition of punitive interest rates.
Bankruptcy Process
Marino asked what could be done to ensure that the “subjective findings” of judges are consistent. Levin agreed that many decisions are discretionary and subjective, and so involving regulators in the bankruptcy process would be helpful in achieving the best result because they have begun adopting regulations for how a resolution should work.
Conyers asked how the Lehman Brothers failure would have been different hds Subchapter V been in existence at the time. Berstein said Subchapter V, in addition to higher capital and liquidity requirements, could have encouraged Lehman brothers to be structured in a different way that would be more conducive to effective resolution.
Trott asked Levin why he has more confidence in regulators than bankruptcy judges. Levin explained that regulators have “learned a lot” in recent years and are in a much better position to deal with a resolution situation than before the crisis. He reiterated that combining the regulators’ knowledge of systemic risks with the bankruptcy expertise of judges would yield the best result.
Johnson noted that the National Bankruptcy Conference stated that that any amendments to the bankruptcy code should make it clear that it retains Title II authorities under the Dodd-Frank Act. Levin said the proposed bill does not affect Title II, but that the proposed Subchapter V would address most of the problems Title II is designed to solve and so it is “hard to imagine” Title II being needed in the future.
Rep. John Ratcliffe (R-Texas) said that while he would like to repeal Dodd-Frank completely, he would like to at least move forward with solving some of its challenges, including Title II. He asked if the bill reduces the need for Title II, to which Hessler replied that the availability of Subchapter V would “effectively render Title II unnecessary.”
Involuntary Bankruptcy Proceedings
Conyers asked why the NBC does not state that regulators should have the authority to commence an involuntary Subchapter V proceeding. Levin explained that even under an involuntary petition, a firm would have to be given a chance for a defense, but time constraints would not allow for a meaningful defense and would undercut due process.
Ratcliffe expressed concern with allowing the Federal Reserve to initiate a bankruptcy proceeding against a firm’s will. Bernstein doubted that the Fed would ever use this power because just the threat that it could employ it would encourage firms’ management to be more cautious. He said the provision is “really only a failsafe for a situation where company management is paralyzed.” He stressed that the constant dialogue between institutions and regulators makes this provision unnecessary.
For more information on this hearing, please click here.