By Michael Flaherty and Emily Stephenson
WASHINGTON (Reuters) - Republican lawmakers in the House of Representatives and Senate are discussing a joint effort to repeal a key section of the landmark Wall Street reform law, seeking to limit the U.S. government's role in supporting financial institutions on the brink of collapse, according to people familiar with the matter.
Efforts by Republicans to revamp the 2010 Dodd-Frank Act, including its handling of failing banks, went nowhere in the past because the Democrat-controlled Senate defended the law.
A new push on the bank resolution issue would still face major hurdles, including a likely veto from President Barack Obama, who has vowed to protect the law, and opposition from the banking sector itself.
But this year, Republicans control both houses of Congress, and they hope to reduce the law's reach and rein in the Federal Reserve and other powerful regulators. Some lawmakers who have pushed for changes in how failed banks are administered, including Senator Pat Toomey of Pennsylvania, have bigger leadership roles.
"We've been meeting every few weeks on the hope that we can produce one, comprehensive product," a Republican aide to the Senate Banking Committee told Reuters, adding that talks involved staff members in the House and Senate.
The segment of Dodd-Frank at issue is called Title II or the orderly liquidation authority. It allows U.S. regulators to intervene to manage the collapse of a systematically risky bank, insurer or other major financial company to avoid a messy failure that spreads risk to the broader financial system.
Republicans say this process would enable bailouts. They are aiming to repeal that provision, limit the short-term loans the U.S. Federal Reserve offers to firms desperate for cash, and make bankruptcy the only option for failing banks.
That would set Republicans, who received more than 60 percent of disclosed financial sector donations in the last congressional election cycle and have historically represented Wall Street's interests on Capitol Hill, at odds with the industry.
Wall Street banks worry that without an orderly liquidation plan in place, markets would not be confident they could be cleanly wound down in a crisis. Bankruptcy also would likely be a less forgiving process for banks.
Several bank lobbyists told Reuters they were staying quiet for now, while the issue mainly gets attention from lawmakers who are already vocal on financial issues, such as Toomey and House Financial Services Chairman Jeb Hensarling.
It is not clear whether key leaders such as Senate Banking Committee Chairman Richard Shelby, a Republican, would support the change. Shelby, a longtime opponent of government bailouts, was against Dodd-Frank but backed its bank-resolution provisions in 2010, according to people involved at the time.
Because the bill under discussion involves changing the bankruptcy code, it would also go to the Senate Judiciary Committee. Representatives for Senator Chuck Grassley, who leads that panel, and Shelby declined to comment.
"It's a long shot, but it's possible this year," the Senate aide said.
Under Title II, the Federal Deposit Insurance Corp (FDIC) would have access to a line of credit from the U.S. Treasury to keep certain bank activities afloat until they can be sold off or wound down. The industry would repay any taxpayer dollars spent in the process.
Republicans say this U.S. government involvement with failed financial firms is a new form of bailout. But Democrats believe the new powers protect the financial system.
"Something that restores the difficulties that we saw in 2008 and 2009 would not be healthy," Senator Jeff Merkley, an Oregon Democrat on the banking committee, said in a conference call with reporters last month.