FSOC on Chopping Block After Republican Victories

Register now

WASHINGTON — Analysts sifting through the outcome of Donald Trump's victory Tuesday night are singling out the Financial Stability Oversight Council as one of the most immediate casualties of the change in administrations.

The interagency group of regulators was formed by the Dodd-Frank Act and tasked with identifying potential systemic risks to the financial system and given the authority to designate nonbank financial firms as systemically important financial institutions.

But because the FSOC is headed by the Treasury secretary, an executive post directed by the White House, a Trump administration is unlikely to continue any of the council's most controversial priorities, including the designation of nonbanks or continued regulation of those firms already designated.

"FSOC is functionally over," said Karen Shaw Petrou, managing partner at Federal Financial Analytics.

The agency has spent much of 2015 and 2016 engaged in a court battle with the insurance giant MetLife over its designation as a SIFI — a battle that recently wended its way to the Court of Appeals for the D.C. Circuit. But that fight may prove moot, Petrou said.

"If the courts were to rule on MetLife by the end of the year, that would validate or invalidate the designation mechanism. But that is nonetheless ultimately a political decision."

Ian Katz, director of Capital Alpha Partners, said that in addition to not redesignating MetLife, the FSOC would likely move to rescind its existing designations for American International Group and Prudential, the other two firms designated as SIFIs. While those designations may face blowback from other members of the panel whose terms will not expire until well into Trump's term, the writing is on the wall.

"Although it probably won't happen in the first several months of a Trump administration, we believe that the FSOC under a Trump Treasury will de-designate AIG and Prudential," Katz said in a note to clients. "The Treasury secretary sets FSOC's priorities and agenda. This process could take many months because it would be difficult to do without new regulators on the council. The FSOC is required to have an annual review of each company's designation, and could decide to rescind the SIFI tag during that review."

Wayne Abernathy, executive vice president of financial institutions policy and regulatory affairs at the American Bankers Association, said that if the FSOC ceases to function — at least as it has to date — then that would at least be owed in part to its failure to realize its promise as a strategizing and coordinating body for financial regulators.

"ABA wasn't a fan of the Dodd-Frank Act, but they were in favor of the creation of the FSOC, because you want to have better coordination among the regulators," Abernathy said. "I don't know that the FSOC has really lived up to the hopes that everybody had for it."

For reprint and licensing requests for this article, click here.
Law and regulation AML Dodd-Frank SIFIs