Eight of ten voting members of the Financial Stability Oversight Council (“FSOC”) testified at a House Financial Services Committee oversight hearing on FSOC’s agenda, operations and structure.
In opening remarks, Representative Jeb Hensarling (R-TX) observed that FSOC has earned “bipartisan condemnation” through measures such as (i) its designation of non-bank financial institutions as “systemically important financial institutions” (“SIFIs”) and (ii) its annual report, that was intended to identify emerging threats to financial stability, but “omit[ted] any references to specific government policies or agencies as helping [to] cause the systemic risk it identifies.”
- The Honorable Mary Jo White, SEC
- SEC Chair White asserted that “the SEC’s historical tripartite mission necessarily gives the SEC unique insight into many areas on which [FSOC] is focused, such as the potential financial stability risks of asset management activities and products, the ongoing changes to market structure and the role of central counterparties.”
- The Honorable Timothy G. Massad, CFTC
- CFTC Chair Massad stated that “one of the most valuable functions of the FSOC is simply to bring together the regulators and agencies that have responsibilities for our financial markets and institutions on a regular basis.”
- The Honorable S. Roy Woodall, Jr., Independent Member with Insurance Expertise
- Mr. Woodall recommended “a set of specific, concrete proposals for additional legislative technical corrections relating to the position of the Independent Member.”
- The Honorable Debbie Matz, National Credit Union Administration (“NCUA”)
- NCUA Chair Matz argued that FSOC “has thus far promoted collaboration across financial regulators, established appropriate rules and procedures which reflect public input, identified four systemically important nonbank financial companies and furthered greater public awareness of threats to our financial system.”
- The Honorable Melvin L. Watt, Federal Housing Finance Agency (“FHFA”)
- Director Watt stated: “Through FHFA’s active participation in all FSOC committees, including the Deputies Committee and all standing committees, FHFA engages regularly with other members on information sharing, policy matters and risk assessments of the entities subject to FSOC jurisdiction and the markets in which they operate.”
- The Honorable Martin J. Gruenberg, FDIC
- FDIC Chair Gruenberg outlined the FDIC’s and FSOC’s mutual effort to identify and address systemic risk and designate SIFIs. He also asserted that “FSOC fills a significant gap in the regulatory framework that existed prior to its creation.”
- The Honorable Richard Cordray, Bureau of Consumer Financial Protection
- Director Cordray argued that “[t]he creation of the FSOC provides, for the first time, a means of comprehensively monitoring the stability of our nation’s financial system.”
- The Honorable Thomas J. Curry, Office of the Comptroller of the Currency
- Comptroller Curry emphasized that “[m]any of the areas of financial risk on which the OCC focuses as part of its bank supervision – for example, credit, liquidity, interest rate and operational risk – are the same risks that the FSOC evaluates with respect to nonbank financial companies.”
Lofchie Comment: SEC Chair White and CFTC Chair Massad said almost nothing about the most controversial aspect of FSOC’s authority: its ability to regulate non-bank financial institutions. Further, little or nothing in the written testimony of the other FSOC voting members seemed to endorse the regulatory power granted to FSOC over non-banks or the manner in which the FSOC operates. Notably, the tone of the witnesses seemed flat and their statements were largely limited to descriptions of the FSOC, or praise for it as a means through which the government could share information.
FSOC’s so-called “independent” representative, who has significant experience as a state insurance regulator, was in many respects quite critical of its operations. He reported that other FSOC members had actively excluded him from participation in deliberations – even those that concerned insurance – and that he had no budget to support his role. Perhaps the other FSOC members were mean to the insurance representative because he alone disagreed with them. For example, acting in his area of expertise and in contrast to all of the other FSOC members, he voted against naming Met Life as a non-bank-SIFI. Notwithstanding the fact that the independent commissioner was appointed because of his expertise in state insurance regulation, none of the federal regulatory appointees deferred to or agreed with him.
On the issue of agreement, SEC Chair White reported in her testimony that “[e]ach of the Council’s five reports [i.e., its annual reports on risks to the U.S. financial system] has been approved unanimously. . . .” The question is this: is that actually a good thing? Does it speak well of FSOC that all of its members agree on everything? If ten very intelligent people can all agree on something as complicated and uncertain as the constitution and cause of risks to the U.S. financial system, it would seem to follow that either (i) they have agreed to something trivial and obvious (and so why bother) or (ii) their agreement is political insofar as it does not allow for disagreement. Unfortunately, because the members of FSOC are all the political appointees of a single party, it is not a useful body to foster discussion and disagreement. If one were truly seeking to create a board of experts to ferret out emerging risks to the U.S. economy, wouldn’t it be better to assemble a group of less like-minded individuals?