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The Article the New York Times Doesn't Want You to Read: The Financial CHOICE Act Ends Bank Bailouts


Washington, May 16 -

*Note: This was written in response to a column that appeared recently in the New York Times. The Chairman's response was submitted to the newspaper, which refuses to publish it.

By Jeb Hensarling

Far from ending bailouts, the Dodd-Frank Act institutionalized them and made them a permanent fixture of the regulatory toolkit.  Dodd-Frank’s “Orderly Liquidation Authority” enables government officials, operating in secrecy, to decide which financial firms will “fail” and which of those firms’ creditors will be protected from loss – and which will not.  By promoting expectations that government will rescue large financial institutions and insulate their creditors and counterparties from losses, Dodd-Frank subverts market discipline and makes future bailouts more likely.     

So long as market participants perceive that regulators and politicians will ride to their rescue in times of crisis, they will engage in reckless behavior that makes the financial system more vulnerable. The solution is to make clear to market participants that they alone will bear the consequences of the risks they choose to undertake, and not taxpayers.

This is precisely why the Financial CHOICE Act, which passed the House Financial Services Committee earlier this month, creates a new subchapter of the Bankruptcy Code specifically tailored to address the failure of a large, complex financial institution. Adding such a subchapter to the Bankruptcy Code enjoys strong bipartisan support, having passed the House twice with overwhelming votes from both Republicans and Democrats.  Additionally, it is consistent with the requirement that banks submit “living wills” to facilitate an orderly resolution under the Bankruptcy Code without extraordinary government support. 

The Financial CHOICE Act also repeals Dodd-Frank’s Title VIII, which created a new class of “too big to fail” entities known as “Financial Market Utilities” and with it access to the Fed’s Discount Window, and it reforms the Federal Reserve’s 13(3) emergency lending authority to significantly reduce its potential use for bailouts while making sure it still exists for liquidity needs.

Because government commits to bankruptcy rather than bailout before a large firm becomes insolvent, creditors will think twice about extending credit to imprudent lenders, knowing that they themselves will bear the costs of failure. Moreover, large firms will likely become smaller, because the credit they obtain is now priced according to their risk of failure, rather than the implicit government-guarantee backing a firm that is deemed “too big to fail.” As a result, failure — when it does happen — will be more easily contained and less destabilizing

By credibly committing government to a “no more bailouts” policy, the Financial CHOICE Act will protect hardworking taxpayers while promoting a more resilient and stable financial system.

Rep. Jeb Hensarling (R-TX) serves as Chairman of the House Financial Services Committee.