On December 1, 2014, the U.S. House of Representatives passed the Financial Institution Bankruptcy Act of 2014 (FIBA). The legislation passed on a voice vote and is supported by the major Wall Street banks.
FIBA is a response to the 2008 financial crisis and will allow large, failing financial institutions to utilize the traditional bankruptcy process while minimizing collateral damage to the worldwide financial markets. Many see FIBA as a rebuke to the Dodd-Frank Act. Dodd-Frank established a system called the Orderly Liquidation Authority (OLA) to be used by regulators in the case of failing banks. Under the OLA, regulators are able to infuse failing banks with public funds in order to prevent systemic interruptions to the financial markets. Critics of Dodd-Frank complained that the OLA was not transparent, gave regulators too much authority to determine levels of recoveries for different creditor classes and risked the loss of taxpayer funds.
In contrast to the regulatory scheme enacted by Dodd-Frank, FIBA would establish a bankruptcy-centered process that can be utilized by failing financial institutions. Under new Subchapter V of the Bankruptcy Code to be added by FIBA, bank holding companies would be permitted to enter Chapter 11, while their operating subsidiaries would remain outside the bankruptcy arena. The subsidiaries would be recapitalized using assets of the debtor/holding company, and would continue as subsidiaries of a new “bridge company” created under FIBA. The equity securities in the bridge company would be held by an independent trustee for the benefit of the holding company’s estate. The trust assets would be distributed by the trustee in accordance with a plan confirmed by the Bankruptcy Court. Through this process, the going-concern value of the operating subsidiaries would be preserved, with minimal disruption occurring to the subsidiaries and the financial markets.
In order to expedite the bankruptcy process, specialized bankruptcy judges would be designated to preside over the big bank bankruptcies. Appeals would be heard by designated federal appellate court judges with bankruptcy expertise and experience.
FIBA is still a long way off from becoming law. The Senate is considering the Taxpayer Protection and Responsible Resolution Act (TPRRA), which shares many of the same policy goals as FIBA. TPRRA calls for a repeal of the OLA, and therefore it is certain to be vetoed by the Obama Administration if it passes Congress.
We will provide further updates on both FIBA and TPRRA.