At a hearing on the process that the Financial Stability
Oversight Council (FSOC) uses to designate systemically important financial
institutions (SIFIs), and against the backdrop of growing concern over the influence of the Financial Stability Board on FSOC SIFI designations, House Financial Services Committee Chair Jeb Hensarling
(R-TX) said that FSOC should cease and desist making new SIFI designations
until Congress comes to an understanding of how the designation process works. He added that empowering FSOC
to impose bank-like standards on non-bank financial firms has expanded the
Fed’s remit throughout the financial
system.
With regard to the designation of asset management firms as
SIFIs, Chairman Hensarling found it almost inconceivable that the failure of an
asset manager could cause systemic risk since they manage other people’s money.
The oversight Chair is also concerned that FSOC seems to taking its direction
on SIFI designations from a secretive international body, the Financial
Stability Board. The Chair is concerned that FSOC is following the lead of the
Financial Stability Board in designating SIFIs.
He noted that neither the Fed nor the SEC has ever reported to Congress
on its participation in the FSB, nor has Congress authorized such
participation. This amounts to a shadow regulatory process, he averred.
Earlier, Chairman Hensarling, in a letter also signed by his five subcommittee Chairs, asked Treasury, Fed Chair Janet Yellen and SEC Chair Mary Jo White to explain to Congress the process FSOC uses to designate SIFIs and the role played by the Financial Stability Board, which has proposed methodologies for designating non-bank global SIFIs.
The
House Chairs are troubled that sweeping power in this area has been invested in
the FSB, which is an unincorporated Swiss association with no authority under
U.S. law or treaty. In their view, the FSB’s semi-official status as an
offshoot of the G-20 makes it an inappropriate forum for decisions of this
importance. Noting that the FSB is a complete black box, the House Chairs do
not believe U.S. sovereignty should be surrendered on financial regulation to what
the call an ``international old boy’s club’’ that deliberates in secret.
At a recent FSOC conference on asset management firms, Mary Miller, Treasury
Under Secretary for Domestic Finance, while noting that the FSB and
the Council have a shared objective of promoting financial stability, emphasized that the domestic and international processes are entirely
independent. In its work, the Council adheres to the standard and
considerations for designations that are listed in the Dodd-Frank Act and in
the Council’s public guidance. She
assured that FSOC is the only authority that can designate an entity for
Federal Reserve Board supervision and enhanced prudential standards. Her remarks take on
heightened importance in light of the recent letter from Chair Hensarling to Treasury and the Fed and SEC
Chairs questioning the role of the FSB in the FSOC SIFI designation process.
In his testimony before the Financial Services Committee, former Treasury official Michael
Barr defended the FSB noting that global coordination is essential to making
the financial system safe for the United States, as well as for the global
economy. The United States has led the way on global reforms, including robust
capital rules, regulation of derivatives, and effective resolution authorities.
These global efforts, including designations by the FSB, are not binding on the
United States. Rather, the FSOC, and U.S. regulators, make independent
regulatory judgments about domestic implementation based on U.S. law. He also
pointed out that the FSB has become more transparent over time, adopting notice
and comment procedures, for example, but it could do more to put in the place
the kind of protections that the FSOC has established domestically.
Rep. Randy N eugebauer (R-TX) said that FSOC’s SIFI
designation process for non-bank financial firms is fatally flawed. He
described it as a highly speculative process that uses worst case scenarios.
Rep. Carolyn Maloney (D-NY) noted that non-bank firms
need to be subjected to stricter
standards if they pose systemic risks. But she added that this power must be exercised with great care, especially
for asset managers that don’t operate like banks. Ultimately, it is a balancing
act between a fair designation process and preserving the ability of FSOC to
mitigate systemic risk.