House Financial Services Committee Issues Report on Dodd-Frank Wall Street Reform, Consumer Protection Act

The House Financial Services Committee issued a report (H.Rpt. 114-574, pt. 1) on legislation (H.R. 4894) to repeal title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The report was advanced by Rep. Jeb Hensarling, R-Texas, on May 19.

Excerpts of the report follow:

PURPOSE AND SUMMARY

H.R. 4894 repeals Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act to ensure that taxpayers will not pay the costs of bailing out large financial institutions or their creditors. Title II establishes an Orderly Liquidation Authority (OLA) that grants the Federal Deposit Insurance Corporation (FDIC) the authority to resolve certain non-bank financial institutions in the event of their failure and the authority to borrow from the Treasury to capitalize an ‘orderly liquidation fund’ that it is authorized to be used to pay off the creditors of a failed firm.

BACKGROUND AND NEED FOR LEGISLATION

The Treasury Secretary must subject a financial company to resolution under Title II after receiving a written recommendation from the FDIC and Federal Reserve and determining, in consultation with the president, that: (1) the financial company is in default or in danger of default; (2) the failure of the company and its resolution under otherwise applicable insolvency law would have serious adverse effects on the financial stability in the United States; (3) no viable private sector alternative is available to prevent the default of the company; (4) any effect of a receivership on creditors, counterparties, and shareholders would be ‘appropriate’ given the benefits of a receivership in terms of preserving financial stability; (5) establishing a receivership would avoid or mitigate the adverse effects on stakeholders relative to not undertaking such action; (6) a federal regulatory agency has ordered the financial company to convert all of its convertible debt instruments that are subject to the regulatory order; and (7) the company is a ‘financial company’ as defined in the Dodd-Frank Act. 1 [Footnote]

[Footnote 1: Id. at 203(b)(1)-(7), 12 U.S.C. Sec. 5383(b)(1)-(7). For broker-dealers, the SEC rather than the FDIC must vote to recommend that the Treasury Secretary subject the firm to resolution. Id. at 203(a)(1)(B), 12 U.S.C. 5383(a)(1)(B). For insurance companies, the Director of the Treasury Department’s Federal Insurance Office, in consultation with the FDIC, must make the required recommendation. Id. at 203(a)(1)(C), 12 U.S.C. 5383(a)(1)(C).]

The Dodd-Frank Act requires that ‘Orderly Liquidation Authority’ resolutions carried out under Title II meet particular requirements. The FDIC must ensure that any action taken in a resolution is necessary to ensure U.S. financial stability and is not being taken to preserve the financial company; that the company’s shareholders do not receive payment until all other claims are paid; that unsecured creditors bear losses in accordance with priority provisions established in the Act; that directors and managers responsible for the firm’s failure are removed; and that the government does not take an equity interest in or become a shareholder of the company or any ‘covered subsidiary.’ 2 [Footnote]

[Footnote 2: Id. at Sec. 206, 12 U.S.C. 5386.]

A resolution under Title II is funded through the ‘Orderly Liquidation Fund,’ which is capitalized using the proceeds of obligations issued by the FDIC and purchased by the Treasury Secretary. 3 [Footnote] Thus, the ‘Orderly Liquidation Fund’ can be used to make loans to the firm being resolved or its ‘covered subsidiaries,’ acquire debt, purchase assets or guarantee them against loss, assume or guarantee obligations, and make payments, including payments to creditors and counterparties of the failed firm. 4 [Footnote] The FDIC is specifically authorized to treat similarly situated creditors differently in order to maximize the value of the company’s assets, minimize the amount of its losses, or to maintain vital operations of the company in receivership. 5 [Footnote]

[Footnote 3: Id. at Sec. 210(n), 12 U.S.C. 5390(n).]

[Footnote 4: Id. at Sec. 204(d), 12 U.S.C. 5384(d).]

[Footnote 5: Id. at Sec. 210(b)(4), 12 U.S.C. 5390(b)(4).]

The ‘Orderly Liquidation Fund’ can also be used to provide operating funds to a bridge financial company established by the FDIC as well as to facilitate the winding-up of the bridge entity through its merger or consolidation with another entity, the sale of its capital stock, the assumption of its liabilities or the acquisition of assets, or its termination or dissolution as provided for under the Act. 6 [Footnote] The FDIC must develop and secure approval of an ‘orderly liquidation plan’ and a ‘mandatory repayment plan’ before deploying the ‘Orderly Liquidation Fund’ in connection with the resolution of a company. If the company cannot repay the funds, the FDIC must impose assessments on creditors and large financial institutions, including financial institutions that may not have transacted any business with the failed firm. 7 [Footnote] Additionally, the FDIC may claw back incentive payments and other compensation made to executives that contributed to the firm’s failure. 8 [Footnote]

[Footnote 6: Id. at Sec. 210(h)(2)(G)(iv), (h)(9), 12 U.S.C. 5390(h)(2)(G)(iv), (h)(9).]

[Footnote 7: Id. at Sec. 210(o), 12 U.S.C. 5390(o). If assessments on claimants receiving more than the liquidation value of their claims are insufficient to repay the obligations issued by the FDIC to the Treasury Secretary, bank holding companies with greater than $50 billion in assets, and non-bank financial institutions that have been designated for ‘heightened prudential supervision’ by the FSOC, are subject to assessments. Id.]

[Footnote 8: Id. at Sec. 210(s), 12 U.S.C. 5390(s).]

Proponents of the ‘Orderly Liquidation Authority’ claim that taxpayers will be paid back, noting that the Dodd-Frank Act provides that ‘taxpayers shall bear no losses from the exercise of any authority under’ Title II. 9 [Footnote] However, taxpayers remain at risk of suffering losses. First, the government has not successfully administered other ‘insurance’ programs that are required to be self-sustaining, and it is unlikely that the FDIC’s experience with the ‘Orderly Liquidation Authority’ will be any different–particularly given the magnitude of the enterprise. The FDIC is authorized to borrow up to 90 percent of the fair value of the failed firm’s total consolidated assets, which is as much as $2 trillion dollars for the largest institutions. But taxpayers will incur losses even if the Orderly Liquidation Fund proves equal to the task of resolving a multi-trillion dollar financial institution. The healthy firms that are assessed to pay for the resolution of a failed competitor will pass the cost of those assessments on to their customers in the form of higher fees on financial products and services, a fact noted by Stanford University Professor John Taylor in testimony before the Financial Services Committee. 10 [Footnote] Finally, witnesses at Committee hearings identified another source of taxpayer exposure from the operation of Title II: the fact that firms undergoing ‘orderly liquidation’ are not required to pay taxes on their franchise, property or income, giving them a competitive advantage and depriving the Treasury of tax revenue. 11 [Footnote] As Richard Fisher, former President of the Dallas Federal Reserve Bank, put it, ‘During the five-year resolution period, incidentally, this nationalized institution does not have to pay taxes of any kind to any government entity, and to us this looks, sounds, and tastes like a taxpayer bailout just hidden behind the opaque and very difficult language of . . . Title II.’ 12 [Footnote]

[Footnote 9: Dodd-Frank Wall Street Reform and Consumer Protection Act Sec. 214(c), 12 U.S.C. 5394 (2012).]

[Footnote 10: Who is Too Big to Fail: Does Title II of the Dodd-Frank Act Enshrine Taxpayer-Funded Bailouts? Hearing Before the Subcomm. on Oversight and Investigations of the H. Comm. on Fin. Services, 113th Cong. (2013), at 17 (statement of John Taylor, Mary and Robert Raymond Professor of Economics, Stanford University).]

[Footnote 11: Oversight Subcomm. Hearing on the OLA, at 7 (statement of David Skeel); Id. at 20 (statement of Joshua Rosner) (noting that the effects of lower-interest-rate borrowing and the tax exemption ‘would ultimately just reinforce the oligopolistic market power of that institution and the small group of institutions that are similar’).]

[Footnote 12: Examining how the Dodd-Frank Act could Result in More Taxpayer-Funded Bailouts: Hearing Before the H. Comm. on Fin. Services, 113th Cong. (2013), at 12 (statement ofRichard Fisher). In his testimony, President Fisher also noted that the healthy firms subject to assessment by the FDIC to recapitalize the OLF after a failure could deduct the assessment as a business expense, further reducing revenue to the Treasury. Id. at 20-21.]

HEARINGS

The Committee on Financial Services held hearings on matters relating to Title II of the Dodd-Frank Act on September 17, 2015; July 28, 2015; and July 9, 2015.

COMMITTEE CONSIDERATION

The Committee on Financial Services met in open session on April 13, 2016 and ordered H.R. 4894 to be reported favorably to the House without amendment by a recorded vote of 34 yeas to 22 nays (recorded vote no. FC-107), a quorum being present. An amendment in the nature of a substitute offered by Ms. Moore was not agreed to by voice vote.

COMMITTEE VOTES

Clause 3(b) of rule XIII of the Rules of the House of Representatives requires the Committee to list the record votes on the motion to report legislation and amendments thereto. The sole recorded vote was on a motion by Chairman Hensarling to report the bill favorably to the House without amendment. The motion was agreed to by a recorded vote of 34 yeas to 22 nays (Record vote no. FC107), a quorum being present.

Insert offset folio 6 here HR574.001

COMMITTEE OVERSIGHT FINDINGS

Pursuant to clause 3(c)(1) of rule XIII of the Rules of the House of Representatives, the findings and recommendations of the Committee based on oversight activities under clause 2(b)(1) of rule X of the Rules of the House of Representatives, are incorporated in the descriptive portions of this report.

PERFORMANCE GOALS AND OBJECTIVES

Pursuant to clause 3(c)(4) of rule XIII of the Rules of the House of Representatives, the Committee states that H.R. 4894 will protect taxpayers from the risk of loss by repealing the ‘Orderly Liquidation Authority’ under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES

In compliance with clause 3(c)(2) of rule XIII of the Rules of the House of Representatives, the Committee adopts as its own the estimate of new budget authority, entitlement authority, or tax expenditures or revenues contained in the cost estimate prepared by the Director of theCongressional Budget Office pursuant to section 402 of the Congressional Budget Act of 1974.

COMMITTEE COST ESTIMATE

The Committee adopts as its own the cost estimate prepared by the Director of the Congressional Budget Office pursuant to section 402 of the Congressional Budget Act of 1974.

CONGRESSIONAL BUDGET OFFICE ESTIMATES

Pursuant to clause 3(c)(3) of rule XIII of the Rules of the House of Representatives, the following is the cost estimate provided by the Congressional Budget Office pursuant to section 402 of the Congressional Budget Act of 1974:

U.S. Congress,

Congressional Budget Office,

Washington, DC, May 6, 2016.

Hon. Jeb Hensarling,

Chairman, Committee on Financial Services,

House of Representatives, Washington, DC.

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 4894, a bill to repeal title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

If you wish further details on this estimate, we will be pleased to provide them. The CBO staff contact is Kathleen Gramp.

Sincerely,

KEITH HALL.

Enclosure.

H.R. 4894–A bill to repeal title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act

Summary: H.R. 4894 would repeal title II of the Dodd-Frank Wall Street Reform Act of 2010. That title provides the Federal Deposit Insurance Corporation (FDIC) with the authority and funding through the Orderly Liquidation Fund (OLF) to liquidate large, systemically important financial firms (including banks and nonbank firms) that become or are in danger of becoming insolvent, subject to certain conditions.

Enacting H.R. 4894 would eliminate the FDIC’s authority to use the OLF. Under current law CBO estimates there is a small chance that the OLF will be used over the next 10 years to resolve very costly financial failures of large firms. CBO estimates that any spending by the OLF will eventually be offset by fees imposed on a portion of the financial industry. However, because of the anticipated lag between OLF expenditures and fee collections, CBO estimates that the fund will operate at a net cost over the 2017-2026 period.

CBO estimates that ending the FDIC’s authority to use the OLF would reduce the deficit by $15.2 billion over the 2017-2026 period, reflecting an estimated reduction in both direct spending and revenues of $20.3 billion and $5.1 billion, respectively. That estimated reduction in the deficit includes an estimated increase in net costs to the Deposit Insurance Fund (DIF) of $1 billion over the same period to resolve additional failures of federally insured depositary institutions.

Pay-as-you-go procedures apply because enacting the legislation would affect direct spending and revenues. CBO estimates that implementing H.R. 4894 would have no significant effect on spending subject to appropriation.

CBO estimates that enacting the legislation would not increase net direct spending or on-budget deficits by more than $5 billion in one or more of the four consecutive 10-year periods beginning in 2027.

H.R. 4894 contains no intergovernmental mandates as defined in the Unfunded Mandates Reform Act (UMRA) and would not affect the budgets of state, local, or tribal governments.

CBO expects that the FDIC would raise assessments on insured deposits to cover the cost of increased losses to the DIF. Doing so would increase the cost of an existing mandate on institutions responsible for paying those assessments. Some of those institutions may also experience savings as the bill would eliminate assessments associated with the OLF. CBO estimates that the incremental cost of the mandate would fall well below the annual threshold established in UMRA for private-sector mandates ($154 million in 2016, adjusted for inflation).

Estimated cost to the Federal Government: The estimated budgetary effect of H.R. 4894 is shown in the following table. The costs of this legislation fall within budget function 370 (commerce and housing credit).

Basis of estimate: For this estimate, CBO assumes that the legislation will be enacted near the beginning of fiscal year 2017. CBO estimates that enacting H.R. 4894 would reduce the deficit by$15.2 billion over the 2017-2026 period. That estimate reflects effects on both the OLF and the DIF, both of which are administered by the FDIC.

Orderly liquidation fund

Current law provides the FDIC with the authority and funding to resolve the failure–or possible failure–of large, systemically important bank and nonbank financial firms. Use of that authority is contingent on certain conditions, including findings by the Secretary of the Treasury that the bankruptcy process would not be appropriate for the resolution of the firm’s financial difficulties and that the firm’s failure would threaten the stability of the nation’s financial system.

If the necessary conditions are met, the FDIC is authorized to borrow funds from the Treasury and implement alternative legal arrangements to resolve the firms’ financial problems. The FDIC is required to collect fees from other large financial firms to offset the cost of any losses resulting from those activities. The net outlays for any financial transactions stemming from the use of the OLF are recorded in the budget on a cash basis and any income from fees is recorded as revenue.

Although the probability that the FDIC will have to liquidate a systemically important firm in any year is small, the potential cash flows associated with resolving them would likely be large. CBO’s baseline projections reflect the estimated probability of various scenarios regarding the frequency and magnitude of systemic financial problems. On an expected value basis, CBO estimates that the potential use of those authorities under current law will increase the deficit by $16.2 billion over the 2017-2026 period, reflecting net direct spending for the OLF of $21.3 billion (which includes recoveries from the sale of assets) and revenues from fees of $5.1 billion, net of effects on payroll and income taxes. CBO estimates that repealing the authorities in title II would reduce the deficit by a corresponding amount.

Deposit insurance

Repealing the FDIC’s orderly liquidation authorities could change how failures of large, systemically important firms would be resolved in the future and who would bear those costs. In the absence of the OLF authority, CBO expects that any future defaults of such firms would have to be resolved through bankruptcy courts using financial resources available from the private sector. After considering the possibility of different outcomes, as detailed below, CBO estimates that without the OLF, the FDIC would realize additional net costs of about $1 billion through the DIF over the next 10 years.

CBO expects that if a systemically important financial firm were to fail, some federally insured depository institutions would be among its creditors, increasing the probability of losses to the DIF. CBO also expects that the losses of those creditors would be larger under a bankruptcy proceeding than a resolution under current law using the OLF because the timing and mechanisms of the bankruptcy process would probably place additional stress on the firm’s creditors and other financial institutions.

The potential effects on the DIF from enacting this legislation would depend on many legal, financial, and economic factors that are difficult to quantify. For example the risk to the DIF of additional bank failures would depend on the exposure of insured depository institutions to higher costs because of the bankruptcy proceedings undertaken to resolve systemically important firms, and whether such banks could remain financially solvent after absorbing such costs. To estimate the additional cost to the DIF under H.R. 4894, CBO considered the estimated cash flows of the OLF and also considered the types of interrelated financial institutions (knowns as counterparties) that would accrue losses because only insured depository institutions that fail would be resolved by the DIF.

CBO’s baseline estimate of the net budgetary effects of the DIF is an average reduction in the deficit of about $9 billion per year. That figure includes average income to the fund from insurance premiums and recoveries of $13 billion per year and costs to the fund to resolve failed institutions of $2 billion or $3 billion per year (excluding operating costs). Those estimates include a very small chance that a large, financially complex institution would fail and that any part of such a firm that is an insured depository institution would be resolved by the DIF.

CBO estimates that under H.R. 4894, the value of assets of failed institutions requiring resolution by the FDIC would increase by about 5 percent above the amount in CBO’s baseline estimates. (The DIF would reflect the overwhelming majority of the effects, although insurance funds, administered by the NCUA, could also experience a loss. This estimate includes the estimated cost to both.) To calculate the net effect on the federal budget, CBO considered conditions where theFDIC’s loss ratio (loss given default, or the net cost of resolving a failed institution before changes in insurance assessment) varied from historical averages of about 18 percent to as high as 30 percent. Furthermore, CBO expects that the FDIC would eventually recover the cost of any additional losses by raising assessments on insured deposits; however, CBO estimates that such recoveries would occur over many years.

Pay-As-You-Go considerations: The Statutory Pay-As-You-Go Act of 2010 establishes budget-reporting and enforcement procedures for legislation affecting direct spending or revenues. The net changes in outlays and revenues that are subject to those pay-as-you-go procedures are shown in the following table.

CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 4894, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON FINANCIAL SERVICES ON APRIL 13, 2016

To view the table, click this link: http://thomas.loc.gov/cgi-bin/cpquery/37?&sid=cp114VPC2n&refer=&r_n=hr574p1.114&db_id=114&item=37&&sid=cp114VPC2n&r_n=hr574p1.114&hd_count=50&item=37&&sel=TOC_10168&.

Increase in long term direct spending and deficits: CBO estimates that enacting the legislation would not increase net direct spending or on-budget deficits in any of the four consecutive 10-year periods beginning in 2027.

Estimated impact on state, local, and tribal governments: H.R. 4894 contains no intergovernmental mandates as defined in UMRA and would not affect the budgets of state, local, or tribal governments.

Estimated impact on the private sector: CBO expects that the FDIC would raise assessments on insured deposits to cover the cost of increased losses to the DIF. Doing so would increase the cost of an existing mandate on institutions responsible for paying those assessments. Some of those institutions may also experience savings, as the bill would eliminate the FDIC’s authority to collect fees to offset losses associated with the OLF. CBO estimates that the incremental cost of the mandate would fall well below the annual threshold established in UMRA for private-sector mandates ($154 million in 2016, adjusted for inflation).

Estimate prepared by: Federal costs: Kathleen Gramp (OLF) and Sarah Puro (DIF); Impact on state, local, and tribal governments: Rachel Austin; Impact on the private sector: Logan Smith.

Estimate approved by: H. Samuel Papenfuss; Deputy Assistant Director for Budget Analysis.

FEDERAL MANDATES STATEMENT

The Committee adopts as its own the estimate of Federal mandates prepared by the Director of the Congressional Budget Office pursuant to section 423 of the Unfunded Mandates reform Act.

ADVISORY COMMITTEE STATEMENT

No advisory committees within the meaning of section 5(b) of the Federal Advisory Committee Act were created by this legislation.

APPLICABILITY TO LEGISLATIVE BRANCH

The Committee finds that the legislation does not relate to the terms and conditions of employment or access to public services or accommodations within the meaning of the section 102(b)(3) of the Congressional Accountability Act.

EARMARK IDENTIFICATION

H.R. 4894 does not contain any congressional earmarks, limited tax benefits, or limited tariff benefits as defined in clause 9 of rule XXI.

DUPLICATION OF FEDERAL PROGRAMS

Pursuant to section 3(g) of H. Res. 5, 114th Cong. (2015), the Committee states that no provision of H.R. 4894 establishes or reauthorizes a program of the Federal Government known to be duplicative of another Federal program, a program that was included in any report from theGovernment Accountability Office to Congress pursuant to section 21 of Public Law 111-139, or a program related to a program identified in the most recent Catalog of Federal Domestic Assistance.

DISCLOSURE OF DIRECTED RULEMAKING

Pursuant to section 3(i) of H. Res. 5, 114th Cong. (2015), the Committee states that H.R. 4894 contains no directed rulemaking.

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Repeal of liquidation authority.

This Section repeals Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act and provides that any Federal law amended by such title shall, on and after H.R. 4894’s effective date, be effective as if Title II had not been enacted.

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the House of Representatives, changes in existing law made by the bill, as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italic, and existing law in which no change is proposed is shown in roman):

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