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Senate Committee Examines FSOC Nonbank Designation Process

The Senate Committee on Banking, Housing, and Urban Affairs recently held a hearing on “FSOC Accountability: Nonbank Designations.” At the hearing, Treasury Secretary Jack Lew highlighted the FSOC’s efforts to be open and transparent, including recent changes adopted in response to industry and congressional criticism. Lew argued that “some opponents of reform have been trying to undermine the FSOC, its members and its ability to respond to potential threats to financial stability” and countered that “[m]any of the arguments levied at FSOC are not based on the actual record.”  Lew highlighted several recent financial reforms and argued that the reforms have left the financial system “in a more robust and resilient position than it was prior to the crisis.” He vowed to “vigilantly defend” against any efforts to roll back reforms, which he suggested would serve to hurt companies that play by the rules, small businesses, and individuals.

ICI President and CEO Paul Schott Stevens also addressed the committee and suggested that the FSOC should only use nonbank SIFI designation as a tool of last resort. Stevens argued that the FSOC and other regulators have many tools available short of SIFI designation, and thus designations should be “quite rare” and only applied when the risks to the financial system are “both large and quite plain, and nothing less than designation will suffice to address them.”

Further, Stevens suggested that the issues of the FSOC seeking to broadly apply its designation authority are compounded by its lack of transparency and lack of specificity in its designation reasoning. While Stevens acknowledged recent efforts, he argued that “the FSOC’s process must be open to the public, analytically based and grounded in the historical record.” He proposed that Congress should amend Dodd-Frank to provide that an institution and its primary regulator should have the opportunity to address any systemic risks before the FSOC has the ability to apply a final designation. He also suggested that Congress should also alter the remedies imposed after a designation, which he finds unnecessary and inappropriate when applied to registered funds and their managers.