The Trump administration wants to narrow powers created after the 2008 banking meltdown to help the US government respond to widespread financial market failures.
The Treasury Department released a report on Wednesday saying it will limit the so-called Orderly Liquidation Authority (OLA) jointly possessed by the agency and the Federal Deposit Insurance Corporation.
Some Republicans have called for the elimination of OLA, which was created in 2010 by Dodd-Frank financial reform. Last year, the House of Representatives passed legislation that would roll back wide swaths of Dodd-Frank, in a proposal that included the total scrapping of OLA.
“Though the serious defects in OLA’s original design must be corrected, Treasury recommends retaining OLA as an emergency tool for use under only extraordinary circumstances,” the Department said on Wednesday.
The report called on regulators to change how they treat creditors, while relinquishing power to bankruptcy courts. It also recommended the passage of legislative reforms to create “a more robust, effective bankruptcy process for financial companies.”
“Treasury stands ready to work with Congress on the enactment of bankruptcy reform and intends to begin administrative implementation of the reforms proposed here that can be accomplished without legislation,” the report stated.
The decision to maintain OLA in some form has relieved proponents of Dodd-Frank. Americans for Financial Reform policy director Marcus Stanley said he “was glad to see the authority embraced in the report,” according to Bloomberg.
Stanley did say he was worried, however, that proposed changes and an emphasis on bankruptcy courts would increase systemic risk, bestowing even greater advantages and implicit guarantees to Wall Street.
In 2008, after the collapse of the investment bank Lehman Brothers, global credit markets seized up, causing complete financial disarray, severe economic contraction, and trillions of dollars in government bailouts and guarantees.
As Wednesday’s report conceded: “the bankruptcy of large, complex financial institutions may not be feasible in some circumstances, including when there is insufficient private financing.”
