WASHINGTON — Senate Banking Committee Chairman Richard Shelby, R-Ala., on Wednesday strongly criticized the Financial Stability Board, saying the international standard-setting body is prompting the U.S. to adopt burdensome financial services rules without congressional or public oversight.

Shelby called the FSB's internal deliberations "opaque" and "devoid of public participation." More scrutiny of its work is needed, he said, since FSB standards appear to motivate many of the actions taken by the Financial Stability Oversight Council, which regulates systemic risk in the U.S.

"The question is whether FSB designations have become a substitute for the independent judgment of our regulators," Shelby said. "Ultimately, the FSB process should not allow U.S. regulators to avoid our own rulemaking process or congressional oversight."

Shelby specifically highlighted the FSB's approach to regulating the insurance industry and interest in tighter rules for asset managers, both of which, he said, have been emulated by the FSOC. Three of the four nonbank firms recently designated by the FSOC as "systemically important financial institutions" — which opens them up to heightened oversight by the Federal Reserve Board — are insurers. The council also earlier this spring concluded a process to seek public comment on the necessity and potential ways of regulating the asset management industry.

Witnesses testifying at the hearing called for legislative action to try and rein in the FSB.

Paul Schott Stevens, chief executive officer of the Investment Company Institute, said that in addition to the proposed reforms of FSOC's structure laid out in a regulatory relief bill sponsored by Shelby, the legislation should also change the international board's makeup. The FSB right now is mostly made up of central bankers and finance ministers, but critics say it should include other voices as well.

"Clearly FSB's work would be far better informed and far more effective if FSB were reconstituted to accord capital market regulators an equal place and an equal voice at the table," Stevens said.

Criticism of the FSB comes as regulators in the U.S. and overseas increasingly move toward regulating the activities of asset managers, rather than designating specific firms for supervision.

Last month, Fed Gov. Daniel Tarullo said multiple times he prefers the activities-based approach, which the industry supports as well. The International Organization of Securities Commissions — a body of global securities regulators — said it would shelve plans developed jointly with the FSB to explore firm-by-firm designations and reconsider an activities-based framework. But it is unclear yet if the FSB agrees. The board has yet to say whether it will table the firm-by-firm approach.

Still, the international board had its defenders at the hearing.

Sen. Sherrod Brown, D-Ohio, the Banking Committee's ranking member, praised both the FSB and FSOC. He said the 2008 turmoil involving firms such as American International Group provided ample rationale for setting minimum standards for nonbanks, and the FSB exists in order to ensure such standards get developed globally.

"Given that all the systemic risk questions have not been answered and regulations are still being considered and implemented, it is clear our work is not done," Brown said. "It would be a shame if instead criticisms of a nonbinding, international coordinating body were used to weaken or stop the kind of safeguards needed to prevent the next AIG."

Adam Posen, president of the Peterson Institute for International Economics, said that in the case of the last financial crisis, the entire financial sector and its regulators were subject to what he calls "cognitive capture," where everyone believed that less regulation was the path to sustained growth. But the FSB has played a critical role in reversing that mentality, he said.

"The FSB has been successful in breaking that down, not just because it has a mandate to look at regulations or a mandate to improve regulations, but because it is... cross border," Posen said. "I think FSB is making huge strides in getting more plugging of holes of the AIG Financial Products-kind, because it involves voluntary shaming and voluntary invoking of the market rather than legislating."

But Stevens said market participants are concerned about a different type of capture in which the FSB routinely favors greater prudential regulation, even in situations that are outside of its expertise.

"I do think there is a cognitive capture at FSB, and it is because virtually all its members and all of its leadership consist of [central] banks," Stevens said. "It should not simply be bankers with their point of view trying to impose bank regulatory models on everyone."

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