Wednesday, June 11, 2014

Congress Grows Concerned About FSB Role in FSOC Designation Process for SIFIs

The role of the Financial Stability Board in the designation of non-bank systemically important financial institutions (SIFIs) has come into stark relief as the Dodd-Frank created Financial Stability Oversight Council considers the SIFI designation of non-bank entities, particularly asset management firms. The Board, formerly the Financial Stability Forum, has become more prominent with the financial crisis and imprimaturs from the G20 to carry out certain tasks in connection with the reform of financial regulation.

Congress has grown increasingly concerned with the role that the FSB plays in the FSOC designation of SIFIs. In a recent to SEC Chair Mary Jo White and Fed Chair Janet Yellen in their capacity as FSOC members, with a copy to Treasury as permanent FSOC Chair, Rep. Jeb Hensarling (R-TX), Chair of the Financial Services Committee, asked the Fed and SEC to respond by May 16, 2014 to a series of questions intended to allow Congress to understand the designation process. The letter was also signed by the Committee’s five Subcommittee Chairs: Rep. Scott Garrett (R-NJ), Capital Markets, Rep. Shelley Moore Capito R-WV), Financial Institutions, Rep. Randy Neugebauer (R-TX), Housing and Insurance, Rep. Patrick McHenry (R-NC), Oversight and Investigations, and Rep. John Campbell (R-CA), Monetary Policy and Trade.

The House Chairs are troubled that sweeping power in this area has been invested in the FSB, which they described as 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 G20 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. The letter requests information on how FSOC’s designation process relates to the Board’s process and seeks assurance that decisions on the systemic importance of U.S. firms is not being outsourced to the G20. The House leaders asked for a response by May 16. I have not yet seen a response to the letter.

In any event, the issue will not go away and is partially responsible for pending legislation to enhance the transparency of FSOC and its designation process. At a recent hearing on the process that FSOC uses to designate SIFIs, Chairman Hensarling said that FSOC should cease and desist making new SIFI designations until Congress comes to an understanding of how the designation process works.