A report by the House Financial Services Committee found that the Financial Stability Oversight Council (FSOC) acts inconsistently and arbitrarily in designating certain non-bank companies as systemically important financial institutions, or SIFIs.
FSOC has stated that its analysis in determining SIFI – also called companies that are “too big to fail” – is based on “industry-specific and company-specific factors.” The Financial Services Committee report says those factors aren’t clear and they change from company to company.
Last March, a federal district court overturned FSOC’s designation of MetLife as a SIFI and characterized the designation as “arbitrary and capricious.” FSOC has appealed that ruling and a decision is expected soon.
“Today’s FSOC designations are tomorrow’s taxpayer-funded bailouts. The FSOC typifies Washington’s shadow regulatory system of powerful government bureaucrats, secretive meetings, arbitrary rules and unchecked power to punish enemies and reward friends,” House Financial Services Committee Chairman Jeb Hensarling (R-TX) said.
“The Obama Treasury Department tried to keep Congress and the American people in the dark about how FSOC exercises its sweeping powers. The release of this staff report brings some much-needed transparency and oversight to FSOC, and the information contained in the documents clearly demonstrates the need for the accountability reforms Republicans have proposed in the Financial CHOICE Act.”
The report says that FSOC did not evaluate the vulnerability to material financial distress of the first four companies designated as SIFIs. FSOC claimed in court both that it is not required to evaluate the probability or likelihood of material financial distress at a nonbank financial company.
However, the committee obtained FSOC documents that shows that FSOC evaluated the vulnerability of some companies to material financial distress – and then declined to designate those companies. The report said FSOC has not explained this disparate treatment.
The committee report contends that FSOC does not follow its own rules for the nonbank designation process.
The Financial Choice Act – a Republican-led plan to replace Dodd-Frank – includes provisions that eliminate FSOC’s authority to designate certain firms as SIFIs, or “too big to fail,” and rescinds previous FSOC designations. Further, the bill would require FSOC to operate with a higher degree of transparency and inclusiveness.