Senate bill would add another step to FSOC designation process

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WASHINGTON — A bipartisan group of senators is pushing a bill that would require the Financial Stability Oversight Council to consider alternative approaches before designating nonbanks as systemically important financial institutions.

The Financial Stability Oversight Improvement Act is authored by Sens. Mike Rounds, R-S.D., Thom Tillis, R-N.C., Doug Jones, D-Ala., and Kyrsten Sinema, D-Ariz. Currently, the FSOC can subject specific nonbanks with the SIFI label to banklike supervision under the Federal Reserve. But the legislation calls on the council to explore other avenues before a designation is final.

“The bipartisan legislation that I propose simply suggests that FSOC consider non-designation alternatives" and "does nothing to detract from FSOC’s emergency designation authority,” Rounds said at a Senate Banking Committee hearing Thursday.

The Dodd-Frank Act gave the council the authority to designate nonbank firms as SIFIs but allowed for the firms to take steps to lower their risk and be reviewed for "de-designation." But the council's authority has long met with skepticism.

“At the outset, the process for nonbank designation was immeasurable and unclear, which was not only contrary to the long-established principles of our regulatory framework, but also led to legal uncertainty that undermined the very objective of FSOC,” Senate Banking Committee Chairman Mike Crapo, R-Idaho, said at the hearing.

American International Group and GE Capital, which both took federal bailout money during the financial crisis, were designated as SIFIs but have since shed the label. MetLife and Prudential, which avoided taking bailout money through stock sales, were also designated. MetLife was able to shed the label through the courts. And Prudential became the last nonbank SIFI to lose its designation, in October 2018.

Some are lauding the new legislation as a sensible approach to require the FSOC to do its due diligence before giving a firm the SIFI label.

"They would have to talk to the company, engage with the company. And presumably, if there is risk in the company, find the most expedient, quickest ways of addressing it,” Paul Schott Stevens, president and chief executive of the Investment Company Institute, said at the hearing.

But another witness warned that the bill could simply delay the process of designating a firm when it is warranted.

Jeremy Kress, a professor of business law at the University of Michigan, said some firms’ primary regulators do not have the authority to address systemic risks.

“Insurance holding companies, hedge funds, you can consult with supervisors of those entities, but do they have authority to implement risk-reducing, activities-based regulations? In many cases, the answer is no,” Kress said.

Kress added that the legislation “would slow the process of designation, lead us to an emergency situation and potentially make any future designation vulnerable to judicial review if a designated entity were to demonstrate any shortcomings in the process.”

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