Treasury Secretary Lew Defends FSOC Before House Financial Services Committee

In testimony before the House Financial Services Committee on the Financial Stability Oversight Council (“FSOC”) 2016 Annual Report, Treasury Secretary Jacob Lew stated that “reforms adopted in the Dodd-Frank Act, including the creation of the Council, have made the financial system safer, more resilient, and supportive of long-term economic growth.”

Secretary Lew stated that the Annual Report is “a key mechanism for public accountability and transparency regarding the Council’s work.” He identified twelve themes in the Report: (i) cybersecurity, (ii) risks associated with asset management products and activities, (iii) capital, liquidity and resolution, (iv) central counterparties, (v) reforms of wholesale funding markets, (vi) reforms relating to reference rates, (vii) data quality, collection and sharing, (viii) house finance reform, (ix) risk management in an environment of low interest rates and rising asset price volatility, (x) changes in financial market structure and implications for financial stability, (xi) financial innovation and migration of activities, and (xii) global economic and financial developments.

As to the overall impact of the FSOC since inception, he argued:

As the forum designed to bring the financial regulatory community together to collaboratively identify and respond to potential threats to financial stability, the [Financial Stability Oversight] Council has done what Congress established it to do, including asking the tough questions that help us make our financial system safer.

Secretary Lew stated that the FSOC:

  • published “a number of findings regarding potential liquidity and redemption and leverage risks, based on careful analysis that included engagement with key stakeholders”;
  • plans to provide timely public updates as analysis continues;
  • will monitor market responses to the implementation of SEC money market mutual fund reforms that go into effect next month; and
  • will continue to monitor for potential threats posed by nonbank financial companies.

Lofchie Comment: The FSOC is a largely partisan organization. It is comprised of members of a single political party, and is made up of regulators assessing the impact of their own regulation. This results in the FSOC’s work product appearing to be more politically motivated than policy-minded, and more self-aggrandizing than self-critical.

The FSOC was intended to bring together perspectives from different regulators; however, it is clearly dominated by the banking regulators and, therefore, the work product very clearly imposes that perspective on the world (which is quite different from the perspective of participants in the capital markets). This perspective, or bias, is most evident by the FSOC’s focus on funds or, as the FSOC calls them, “shadow banks.”

Finally, the FSOC seems oddly focused on securities lending and other securities financing transactions, and inappropriately indifferent to big picture concerns that seem much more likely to create systemic risk, such as the potential for failures by municipal entities or the underfunding of pension plans.

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