House Financial Services Committee Continues Markup of Financial Stability Improvement Act

On Tuesday and Wednesday, the House Financial Services Committee continued its markup of the Financial Stability Improvement Act of 2009 (FSIA).  The markup will continue today and possibly Friday.

On Tuesday, two key amendments were approved.  The first amendment clarifies that the powers granted to the Federal Reserve under the FSIA would be granted to the Board of Governors of the Federal Reserve System, rather than to the presidents of the individual Federal Reserve Banks.  The amendment addressed concerns regarding the relationships the Federal Reserve Banks have with many financial institutions, and sought to remove the opportunity for those relationships to influence the Federal Reserve’s exercise of its authority under the FSIA. 

The second amendment requires the FDIC, as receiver of a failed bank, to remove the board of directors of a failed institution.  Prior to this amendment, only management of the failed insured depository institutions was required to be removed.

Two Republican amendments failed on roll-call votes.  The first would have prohibited the use of government funds “for making loans to a company, purchasing assets from a company, assuming or guaranteeing assets of a company, or any other purpose, other than offsetting the administrative cost of running a Federal department or agency.”  The second was intended to remove the Treasury Secretary’s authority to extend TARP for an additional year.

On Wednesday, several additional amendments were approved, many of which were technical or clarifying amendments made necessary in the earlier markup hearings.  Major amendments passed included:

• FDIC Guarantee Program.  Chairman Barney Frank (D-MA) offered an amendment that would extend the FDIC's guarantee program, but only for healthy, solvent financial institutions.  The program would be funded by fees paid by participants in the program and, in the event that losses under the program exceeded the fees charged by the FDIC, participants would be required to make up any shortfall.
   
• Secured Creditors.  This amendment would authorize regulators to treat up to 20% of a secured creditor’s claim in the assets of a failed institution as an unsecured claim in order to “satisfy completely any amounts owed to the United States or to the Fund….”  The stated purpose of this amendment was to increase market discipline by requiring all creditors, including secured creditors, to improve their underwriting standards and to ensure that creditors look to the creditworthiness of the borrowing financial institution, and not just to the collateral securing the institution's obligations.
   
• Risk Retention.  This amendment would require a “creditor or securitizer to retain 5 percent of the credit risk on any loan that is transferred, sold, or conveyed by such creditor or securitized by such securitizer….”  The amendment would also authorize federal regulatory agencies to adjust the risk-retention percentage up or down, depending on the underwriting standards used by the creditor or securitizer.  A second-degree amendment clarified that federal regulators could reduce the risk-retention percentage down to 0%, if conditions warrant such a reduction.

The most controversial amendment of the day was offered by Rep. Paul Kanjorski (D-PA).  His amendment would provide the Financial Services Oversight Council (FSOC), created under FSIA, with authority to break up institutions deemed systemically significant.  The breaking up or divestiture would occur if such an institution were likely to pose a systemic risk to the financial system.  Noting that such a breakup would only occur in “extreme” cases, the amendment provides that the FSOC must consult with the Treasury Secretary if the divestiture involves assets in excess of $10 billion and the President if it involves assets of $100 billion or more.  These financial institutions “would need to demonstrate to regulators that their failure would not undermine the financial stability of the American economy” in order to escape being broken up.  The amendment passed by a vote of 38 to 29.