Description:
As ordered reported by the House Committee on the Judiciary on September 10, 2014
H.R. 5421 would modify the bankruptcy process for certain large financial institutions. Pay-as-you-go procedures apply because enacting the legislation would lower the probability that such an institution would be liquidated by the federal government upon failure, potentially having a small effect on direct spending and revenues. However, CBO expects that failures handled through the bankruptcy code under the bill would not affect the net cash flows of the federal government under current law. Thus, we estimate that H.R. 5421 would have no significant effect on the budget, including discretionary spending, over the next 10 years.
Under current law, the federal government may place certain large and interconnected financial institutions, upon failure, into receivership of the Federal Deposit Insurance Corporation (FDIC). Similar to its historical role as receiver of commercial banks and thrifts, the FDIC may sell the failed institution’s assets, merge it with a healthy institution, continue operations through a bridge company, or some combination thereof. Most likely, the receivership will require short-term (and in some cases long-term) financing to quell the liquidity and insolvency concerns that result in the institution’s failure. Under current law, such funding is available through the Treasury. While this borrowing must be repaid in full, CBO believes that repayment generally will occur over multiple years. As such, CBO estimates that this authority (also known as Orderly Liquidation Authority, or OLA) will have no net budget effect over time, but will increase deficits in some years. CBO’s most recent baseline projects that use of OLA will increase deficits by about $19 billion over the 2015-2024 period. (This projection assumes a low probability that OLA will be triggered in each year. Actual cash flows will be zero in most years and much higher in years when OLA is used.)
