Republicans and the Orderly Liquidation Authority

Trump scandals are not an altogether bad thing for Congressional Republicans.  They do create a suitable distraction to allow Republicans to pass their legislative agenda, which would create a lot more resistance if anyone was actually paying attention.  Health care has attracted the most attention but just recently the House also voted on strict party lines to repeal the Frank-Dodd financial regulations enacted in the wake of the financial crisis. Because this is a regulatory, rather than a budgetary, matter, Democrats will filibuster it in the Senate and it will not become law.

Kevin Drum, in frustration, has asked why this is so important to Republicans.  Do they want another financial crisis?  What gives?  Reading their comments, the stated reason is clear enough.  They disapproval of all economic regulation as a matter of general principle and in particular see the regulations of Frank-Dodd as a burden on the general economy and in particular as giving the advantage to large banks that can better afford the costs of compliance than community banks.  But if that is the case, why not just pass a narrower bill giving financial relief to community banks and leave the regulations in place on big banks?  

Republicans' other argument is that regulations amount to "micromanagement" and that all that is really needed is adequate capital ratios for banks and regulations will no longer be necessary.  There may be something to their reasoning.  The trouble with financial safety regulations is the constant danger of fighting the last war -- safeguarding against the specific investment vehicle that caused the last crisis, only to miss the one that causes the next crisis.  But the underlying all financial crises is the matter of leverage -- the debt to equity ratio.  Keep banks from overleveraging, and there will be no need to keep them from making bad investments.  

But no system is fool-proof.  The repeal is called the CHOICE Act because it purports to give banks the choice between maintaining high capital ratios and complying with complex regulations.  What if banks choose the complex regulations, confident that a Republican administration won't enforce them anyhow?  What if they choose the regulations and the regulators do, indeed, miss the next upcoming bubble?  What if banks  choose the higher capital ratios but there is no enforcement mechanism?  In short, what if, despite the rules, there is a new financial crisis, or at least the failure of a major bank that could threaten a financial crisis?  (Recall that the last crisis occurred with the failure of Lehman Brothers).  Frank-Dodd has mechanisms in place to deal with such an eventuality.  Naturally the Republicans want to destroy those, too.

First, the Republican legislation weakens the "stress tests" that banks are subject to that allow us to catch problems early.  Next, it ends the Orderly Liquidation Authority (OLA), which allows regulators to shut down a failing bank in such a way as to minimize damage to the financial system as a whole.  The OLA was created as an alternative to bankruptcy because when Lehman Brothers declared bankruptcy, it set off a general financial panic.  The goal is to keep that from happening again.  The OLA required banks to have advance plans for how they will be dismantled in such a case.  The Republican bill provides for failing banks to be disassembled in bankruptcy, but bankruptcy has problems.  

The goal is to act quickly, so as to prevent a panic.  Bankruptcy can freeze the bank's creditors for 48 hours to prevent a run, but an orderly restructuring must be in place within that time.  Hence the OLA's requirement that all such institutions plan ahead for such an event.  The Republican bill does not end such plans as they exist now, but prevents the regulators from requiring any new banks from drawing up such plans, even if they get big enough to endanger the financial system.  Bankruptcy courts cannot coordinate if multiple firms are failing at once (as happened in 2008).  They cannot coordinate with international regulators to prevent an international panic (as happened in 2008).  And bankruptcy courts can't lend money if needed to temporarily stabilize the financial system.  It is this last that Republicans seize on, calling all such lending a "bailout," to be avoided at all costs (such as, say, the crash of the financial system).  

Oh, yes, and the Republicans also split the monetary policy and financial regulation portions of the Federal Reserve to prevent it as far as possible from saving the economy in case of crisis. 

So, does this thing stand a chance of getting past a Democratic filibuster in the Senate?  Since it is a regulatory, rather than a budgetary, matter, the basic answer is no.  But since the OLA could potentially spend money, that part can be killed by reconciliation, i.e., by a simple majority.   Already Donald Trump has signed an executive order forbidding use of the OLA in case of crisis.  

So why the feud with the OLA, which could prevent a single failed bank from escalating into a general panic?  Stay tuned for the next installment.