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Is the Financial Stability Oversight Council Enabling ‘Too Big to Fail’?

politicsThe question of whether “Too Big to Fail” still exists remains a hotly debated topic among lawmakers in Washington, and it was the prime topic of discussion on Tuesday at an oversight hearing for the Financial Stability Oversight Council (FSOC) in the House Financial Services Committee on Tuesday.

Eight of the FSOC’s 10 voting members testified at the hearing; among those that testified were Federal Housing Finance Agency Director Mel Watt, Consumer Financial Protection Bureau Director Richard Cordray, Comptroller of the Currency Thomas Curry, and FDIC Chairman Martin Gruenberg.

The FSOC, like the CFPB, was created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. While supporters of Dodd-Frank claim that the controversial legislation put an end to the taxpayer-funded bailouts for institutions deemed “Too Big to Fail,” its opponents claim that the law actually codifies “Too Big to Fail” by giving the FSOC the authority to designate certain institutions as “systemically important.” The Council’s criteria for designating institutions as such as been another highly debated topic in Washington.

“Of all of the Council’s activities, none generates more controversy than its designation of non-bank financial institutions as ‘systemically important financial institutions,’ or SIFIs. Designation anoints institutions as Too Big to Fail, meaning today’s SIFI designations are tomorrow’s taxpayer-funded bailouts,” said Jeb Hensarling (R-Texas), Chairman of the Committee. “Designation also ominously grants the Federal Reserve near de facto management authority over such institutions, thus allowing huge swaths of the economy to potentially be controlled by the federal government.”

One non-bank institution designated by the FSOC as systemically important, MetLife Insurance, has sued to try to have that designation removed, claiming that the designation results in higher compliance costs which in turn lead to higher prices for their customers. Indeed, the Council’s independent insurance expert, Roy Woodall, Jr., testified at Tuesday’s hearing that the systemically important designation attached to insurance companies such as MetLife has the potential to lead to higher prices for consumers.

“Designation anoints institutions as Too Big to Fail, meaning today’s SIFI designations are tomorrow’s taxpayer-funded bailouts.”

Jeb Hensarling

The transparency of the FSOC was also called into question during the hearing; it was brought out that the Council’s meetings are mostly held in private and the publicly released minutes from those meetings do not contain much substantive information on what was discussed in those meetings. The Council also determined that the process for designating an organization as systemically important has been “marked by a striking lack of due process” and that organizations targeted by the FSOC for designation do not have access to materials the FSOC uses to make its determinations—and therefore they have limited opportunities to modify their activities in order to become less “systemically important.”

The Committee also determined that the regulatory process is politicized because the FSOC’s authority is concentrated in the hands of its members—all of whom except one (Woodall) are heads of regulatory agencies, who have been appointed by the president. Such a structure “not only distorts the lines of accountability and expertise among regulators, it distorts the balance that exists within regulatory agencies and erodes their independence,” according to the Committee.

Click on the Council member’s name below to read his or her opening remarks at the hearing. The two voting members not present at Tuesday’s hearing were Federal Reserve Chairman Janet Yellen and Treasury Secretary Jack Lew.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.
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