Tags: FSOC | Barr | SEC | SIFI

House Financial Services Committee Proposes Bills to Reform FSOC

By    |   Tuesday, 27 May 2014 07:46 AM

The House Financial Services Committee, chaired by Rep. Jeb Hensarling, R-Texas, held a hearing on May 20 titled "Examining the Dangers of the FSOC Designation Process and Its Impact on the U.S. Economy" in order to consider industry objections to the way the Financial Stability Oversight Council (FSOC) conducts its business and to propose a remedial bill, H.R. 4387, the FSOC Transparency and Accountability Act.

The witnesses were five pro-industry experts and Michael Barr of the University of Michigan Law School, a former Treasury official in the Obama administration who participated in establishing the FSOC.

The opening statements were barely audible, apparently due to faulty settings, but Hensarling complained that the FSOC is not designating Fannie Mae, Freddie Mac or the U.S. Government itself as systemically important financial institutions (SIFIs), that the U.S. financial regulators participating in the global designation process have not consulted with Congress and that designation of insurance companies as SIFIs will somehow drive up the cost of insurance.

Rep. Maxine Waters, D-Calif., argued that SIFI designation of insurance companies is needed because trillions of dollars were lost due to the 2008 episode of the ongoing crisis and the existing regulators had not examined the non-insurance activities of AIG that were a major contributor to that crisis.

Among the witnesses, Paul Atkins, a former Republican commissioner of the Securities and Exchange Commission (SEC), charged that the Federal Reserve is trying to impose a "no-risk" regulatory regime ported from the banking industry on the insurance industry. (With the "too big to fail" banks receiving an emergency government rescue in 2008, one wonders what Atkins can possibly be talking about; however, when he questions the ability of the Fed to regulate the capital markets, he is on target, but he could also be referring to the SEC, whose so-called Consolidated Supervised Entity program for the largest securities firms totally failed in the crisis.) Further, Atkins asserted that mutual funds are not a source, but rather a bearer, of counterparty risk, ignoring the danger that if the funds are unable to bear those risks successfully, they become a source of risk.

Peter Wallison, a fellow at the American Enterprise Institute, remains in denial that the 2008 episode was anything more than an aberration due to the bursting of the housing bubble, and he called for Congress to get involved in order to curb the excesses of the FSOC, such as the imposition of bank-like regulation.

William McNabb, CEO of Vanguard, objected to capital and liquidity requirements, as well as possible fees and assessments, impairing the competitiveness of mutual funds. He suggested that the FSOC defer to the SEC, but this has already been tried, with disastrous results.

Barr might confirm the worst fears of Republicans, because he insisted that the crisis required the kind of heightened supervision and international coordination that is contemplated by the FSOC provisions of Dodd-Frank.

This writer has met Barr and lunched with him informally at a Washington event. He graciously accepted this writer's criticism that the events of 2008 were not an accident, but rather the result of faulty regulation and that the weak implementation of Dodd-Frank does not eliminate, but rather reinforces, the doctrine of too big to fail.

Barr takes a heroically optimistic view of the ability of the regulators to use the new powers and agencies created by Dodd-Frank to mitigate the impact of the next financial crisis.

(Archived video, the staff memorandum, and the proposed bills can be found here.)

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The House Financial Services Committee, chaired by Rep. Jeb Hensarling, R-Texas, held a hearing on May 20 titled "Examining the Dangers of the FSOC Designation Process and Its Impact on the U.S. Economy."
Tuesday, 27 May 2014 07:46 AM
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