Senators Introduce Legislation to Limit FRB's Lending Authority (with Lofchie Comment)

U.S. Senators Elizabeth Warren (D-MA) and David Vitter (R-LA) introduced the "Bailout Prevention Act of 2015" (the "bill"). The bill would halt large bank bailouts during a financial crisis by limiting the lending authority of the Board of Governors of the Federal Reserve System ("FRB").

Under the legislation, a bank would be required to prove it was not insolvent before receiving money from the FRB. The proof would be based on an analysis conducted by all of the federal banking regulators of assets and liabilities over the preceding four-month period.

Additionally, the legislation would repeal Bank Holding Company Act Section 4(o), which is a grandfathered clause that allows certain large banks to conduct a wide array of commodities-related activities.

The bill was assigned to the Senate Committee on Banking, Housing and Urban Affairs on May 13, 2015. The Committee will consider the legislation before deciding whether to send it on to the House or the full Senate.

Lofchie Comment: Section 3 of the proposal, which comprises most of the legislation, imposes very detailed procedural requirements on every future Congress and President concerning how and when to respond to a financial crisis, even to the point of specifying the time periods to be allowed for debates, whether a debate should be allowed at all (in many situations, it wouldn't be allowed), the words that a future Congress must use when taking action, a prohibition against any "points of order" being raised, whether a postponement of action is allowable, the time limit that should be permitted for debate in the ordinary course (not more than 10 hours, split between the parties), and the time period that can be permitted in response to a Presidential veto (30 minutes to each party).

Making sensible rules to govern our present-day circumstances is a very difficult task and Congress is not always successful in performing it. In the face of that uneven record, proposing a law that does not merely govern future decisions by Congress on how to deal with a financial crisis, but also purports to dictate even the amount of time that a future Congress can spend discussing the issues demands extraordinary confidence. Is it really good government for this Congress to decide that a future Congress can spend only an hour discussing a Presidential veto?

Essentially, the substance of the bill is consistent with the procedural requirements. For example, the requirement that all federal banking regulators make a determination that any troubled bank has been solvent for the last four months ensures that the relevant bank will have failed before any of the regulators can make a determination. Read literally, the proposal leaves future bank regulators no determinations to make because they cannot possibly satisfy the requirements.

See: Discussion Draft of Bill; Senator Warren's Press Release; Senator Vitter's Press Release.
Related news: Senators Introduce Legislation Aimed at FRB Accountability (with Lofchie Comment) (May 8, 2015).