At a hearing held last week examining Financial Stability Oversight Council (FSOC) designations of nonbank financial companies as systemically important financial institutions (SIFIs), Paul Schott Stevens, president and CEO of the Investment Company Institute (ICI), shared his thoughts and concerns.
FSOC issued guidance earlier this month proposing the practice of performing a cost-benefit analysis before designating any nonbank financial company. In this process it would look at the benefits and costs of a designation for the U.S. financial system and the company. A nonbank financial company would only be designated if the expected benefits justify the expected costs of the designation.
Further, FSOC would take an activities-based approach to identify, assess, and address potential risks to U.S. financial stability. If a potential risk to U.S. financial stability is identified, the council would leverage the expertise of existing regulators in pursuing the implementation of actions to address the risk.
“Ten years after the financial crisis, the financial system is more robust and resilient. The time is right to review the effectiveness of post-crisis reforms and to make tailored adjustments,” Stevens testified before the Senate Committee on Banking, Housing, and Urban Affairs “Designation of specific firms can create significant market distortions, including increased moral hazard and reduced competition and consumer choice. We believe there is and should be a very high bar for singling out individual companies as SIFIs. The SIFI designation process should be reformed to address widely recognized shortcomings.”
Stevens said officials should recognize the need to allow for greater engagement with a company being considered for designation and a greater role for the company’s primary financial regulator. It also requires more analytical rigor and attention to actual experience and greater transparency to markets and the public, Stevens added.
“Policymakers are moving in the proper direction. The Treasury Department’s November 2017 report on FSOC offered a series of constructive recommendations for the designation process. And just last week, the FSOC itself proposed to implement these recommendations. FSOC has proposed “prioritizing” an activities-based approach to addressing systemic risk, while reserving SIFI designation as a last resort whenever necessary,” Stevens said.
He hailed the Senate for recently introducing bipartisan legislation – the Financial Stability Oversight Council Improvement Act of 2019 – that would require the council to consider whether other steps could mitigate any potential risks posed by a nonbank financial company before voting to designate that company. The legislation would help ensure that the council considers the full range of options available to mitigate risks and makes an informed decision, Stevens said.
“ICI urges this committee to consider S. 603 and report it favorably to the full Senate,” he added.