Republican Staff Rips into “SIFI” Designation Process

Republican staff members of the House of Representatives Financial Services Committee issued a Report titled: The Arbitrary and Inconsistent FSOC Nonbank Designation Process. The Report sharply criticized the designation process by the Financial Stability Oversight Council (“FSOC”) for Systemically Important Financial Institutions (“SIFIs”), which are subject to enhanced regulatory standards.

Republican staff members analyzed nonpublic internal FSOC documents and concluded that FSOC does not adhere to its own rules and guidance in the following ways:

  • FSOC considers “non-systemic risks” when determining whether to make a “systemically important” designation.
  • FSOC “simply assumes” that financial distress at a company will cause the impairment of financial market functioning, and damage to the broader economy, without actually making such a determination, as required by FSOC’s own rules.
  • FSOC fails to follow its own requirement that the evaluation of the systemic risk posed by individual firms must be done “in the context of a period of overall stress in the financial services industry and in a weak macroeconomic environment.”
  • FSOC shows a particular lack of consistency when considering whether to factor the use of collateral in certain financial transactions into designation decisions.

Republican staff concluded that FSOC’s analysis of companies has been “inconsistent and arbitrary.”

Lofchie Comment: The legislation granting FSOC the authority to designate firms as SIFIs is open-ended and ambiguous. The legislation effectively allows the government to decide arbitrarily which companies it elects to designate as SIFIs. (Seee.g.ACLI Files Amicus Brief in MetLife v. FSOC.) The House Report found that the FSOC decision-making process was more open-ended than the provisions governing it. Patrick Pinschmidt, who was the Deputy Assistant Secretary for FSOC, makes the point more sharply in his testimony in the Appendix attached to the Report. According to Mr. Pinschmidt, “there are no bright-line thresholds in terms of what’s bad or what’s good. . . . [I]t’s a qualitative assessment based on significant qualitative analysis. . . . And it’s up to each voting member of the Council to decide . . . what constitutes a significant threshold. . . .”

There is no reason to believe that those who are in or out of government are especially good at making company-specific decisions based on qualitative factors. Picking winners and losers in the market is nearly impossible to do consistently. That is just one reason why the government should not make “qualitative” choices about which companies should be regulated.

Inevitably, the House Republicans’ report on FSOC will be criticized by Democrats as partisan. That said, Democrats should be pleased if the outcome is that the FSOC is stripped of its designation authority, since they should not want Republicans to hold this arbitrary authority and possibly use it against those who may support the Democrats. None of us should want the government to hold this arbitrary authority. Instead, let’s have clear and objective rules.

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