Former Federal Reserve Chairman Ben Bernanke defended a key portion of the Dodd-Frank Act on Tuesday, ahead of this week’s House vote on a bill that would replace much of the 2010 law.
Bernanke, the Fed’s chairman from 2006 to 2014, said Congress should keep Dodd-Frank’s orderly liquidation authority (OLA), the process through which the federal government would take over and manage the assets of a failing bank to prevent a financial crisis.
“I’m puzzled by arguments that say ‘OLA isn’t perfect, let’s get rid of it,’” Bernanke said at a Brookings Institute panel.
{mosads}The House is scheduled to vote this week on the Financial CHOICE Act, a sweeping rewrite of Dodd-Frank. The GOP bill would replace OLA with an addition to the bankruptcy code, which banks can’t currently use when they fail.
OLA was meant to ensure that failing banks could be taken apart in a way that protected global financial markets from a massive bank run or financing freeze.
But the process has become more controversial since Dodd-Frank’s passage. Critics say it incentivizes financial institutions to engage in risky behavior, since they can expect regulators to come to the rescue in emergencies. Republicans have long derided it as a bank “bailout.”
Hester Pierce, a senior research fellow at the libertarian-leaning Mercatus Center at George Mason University, compared OLA to an auto-flush toilet at the Brookings event.
“Once you know those things are out there you stop doing what your mother taught you to do,” Pierce said.
OLA’s defenders argue bankruptcy courts cannot take into account the stability of the world economy when resolving the failure of banks that are “too big to fail.”
Bernanke and other supporters say the process is only for a crisis and the only alternative is breaking up big banks.
“We saw what happened without OLA,” Bernanke said. “It was 2008.”
Sylvan Lane contributed reporting.