The House Oversight and Investigations Subcommittee examined the process used by the Financial Stability Oversight Council (FSOC) to designate systemically important financial institutions (SIFIs) at a hearing last week, determining that it poses a threat to the U.S. economy.
Several witnesses raised concerns about FSOC’s process of deeming banks as “too big to fail,” calling it arbitrary and inconsistent.
“Even if FSOC were following the rules and designating non-bank financial companies fairly, consistently and with good reason — which the Committee’s report suggests in not always the case — the process FSOC has developed to designate non-bank financial companies as SIFIs can disrupt markets and impose unnecessary regulatory burdens and costs that outweigh its benefits to the economy. So, despite slight improvements made two years ago, FSOC’s process is still fatally flawed,” Douglas Holtz-Eakin, president of the American Action Forum, said in his testimony.
Paul Kupiec, resident scholar at the American Enterprise Institute said FSOC does not evaluate all firms under a common standard.
“Apparently, some companies are evaluated by the FSOC based on a subjective judgement about the financial stability impact of the firm’s failure in a normal market, whereas other institutions are judged according to the impact their failure may have when financial markets and the economy are in turmoil,” Kupiec said.
Other witnesses commented on the Financial Services Committee’s Majority Staff Report, which revealed significant concerns with the process employed by the FSOC to designate nonbank financial institutions as “too big to fail” as well.
“The staff paper of FSOC’s evaluations of possible SIFIs, those recommended for designation and those not, details the inconsistencies in treatment,” Alex Pollock, distinguished senior fellow at the R Street Institute, said. “But these differences pale beside the huge discrepancy of those companies chosen for evaluation and those companies not evaluated at all, because the previous Treasury Secretary did not approve their being studied. So, the FSOC staff did not even analyze them because of some higher, prior, political judgment. I think this could fairly be characterized as desperately wanting to ‘see no evil’ when it comes to the systemic financial risk of some entities.”
According to Subcommittee Chair Ann Wagner (R-MO), the Financial CHOICE Act, the Republican plan to replace Dodd-Frank, would end SIFIs and bailouts.
“We are in the slowest economic recovery of our lifetimes and we must reform this Washington-knows-best system,” Wagner said. “Through the Financial CHOICE Act, we will hold FSOC more accountable, end taxpayer-funded bailouts, and open up our economy through smarter regulations to provide American families with the financial relief they deserve.”