Big banks are no longer too big too fail under legislation that is steaming through the US Congress.
The Wall Street Journal is reporting that the US House of Representatives is set to vote on changes to the bankruptcy code that will make it easier to allow a major bank to fail.
The changes is included in a financial services budget bill, along with other regulatory provisions such as congressional oversight of the Consumer Financial Protection Bureau’s budget.
But unlike other provisions, the draft bankruptcy bill has broad support and could become law this year, according to WSJ.
The so-called Financial Institutions Bankruptcy Act would establish a section of the bankruptcy code specifically for large financial firms.
It is designed to prevent a repeat of the 2008 Lehman Brothers debacle when the investment bank’s bankruptcy filing caused widespread financial panic that brought the global economy to its knees.
Under the bill, regulators and bankruptcy judges would have more power and flexibility to sort out the liabilities of a failing firm and to stabilize its continuing operations.
The bill has already passed the House Judiciary Committee unanimously, and passed the House by voice vote.
By including it in a budget bill, it becomes more likely to clear Congress this year.
Lawmakers are unlikely to pass much legislation in an election year, but they must vote to keep the government funded.
Rep. David Trott, its primary sponsor, “believes the inclusion of the language in the appropriations bill further builds momentum for this bipartisan plan to protect taxpayers and he hopes the Senate will take up the legislation soon”.
The Senate financial services funding bill does not currently include the provision but it could be added to a final spending deal lawmakers negotiate.
The White House said last month that “revisions to the bankruptcy code have no place in an appropriations bill”.
But the statement did not oppose the substance of the bankruptcy code changes and many regulators have previously supported reworking the bankruptcy code to better handle large financial firms.
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