HSFC targets ‘secretive’ financial authority process in designations of nonbank SIFIs, G-SIIs

The leadership  of the House Committee on Financial Services (HFSC) is seeking answers on the national and international apparatus that is creating systemically risky designations for nonbank financial institutions, trying to pry the lid off what it sees as a “black box.”

 Led by Chairman Jeb Hensarling, R-Texas, key FSC majority members late last week decried  what they is a lack of transparency on the process of the Financial Stability Oversight Council (FSOC)  and the G-20’s Financial Stability Board (FSB), and pressed the FSOC members who also serve on the FSB for an explanation on how companies can take steps to remove these designations.

The critique alleging “sweeping powers” by “an unincorporated Swiss ‘association,'” in the FSB, and a lack of clarity by the FSOC designation process was delivered in a May 9 letter to U.S.Treasury Secretary Jacob Lew, Federal Reserve Chairwoman Janet Yellen and Securities and Exchange Chairwoman Mary Jo White.

The HFSC wants FSOC to halt any further designations of insurers until this regulatory gap is resolved and “it is clear that insurers will not be subject to bank capital standards.”

The letter went so far as to suggest that the FSB, which is directing the International Association of Insurance Supervisors (IAIS) to come up with adequate capital standards for the systemically risky insurers as well as globally active insurers, an international “old boy’s club”  that “deliberates” in secret.

Both FSOC and FSB appear to take a we-know-it-when-we-see-it” approach to identifying firms that pose a risk to financial stability. In particular, there do not appear to be clear rules or criteria to determine when a nonbank financial institution qualifies as a “systemic risk” to the U.S. or global financial system, the letter charged.

Moreover, “..there still is no universallyaccepted definition of the term “systemic risk.Nor have the FSOC or the FSB ever adequately explained the degree of systemic risk needed to merit designation as a SIFI [systemically important financial institution],” the letter stated.

In the U.S., three nonbank companies, AIG, Prudential and then GE, have already been designated as SIFIs. AIG has been a SIFI now for almost a year. The FSOC is now reviewing major asset managers as possible non-bank SIFIs.  Last July, the IAIS designated major international insurers as global systemically important insurers. These global G-SIIs included AIG, Prudential and MetLife. MetLife is currently under FSOC review as a possible SIFI and has been for almost a year.  It has made no secret of the fact it is not happy with the potential outcome. Reinsurers worldwide, such as Berkshire Hathaway, are to be considered by the IAIS this year for a possible global designation.

The HFSC letter made a number of demands for clarification, participation and transparency from both the FSOC and the FSB, calling for an end to secrecy in the SIFI designation process domestically and globally.

The Committee asked Lew, Yellen and White to  provide by May 16  “all memoranda or communiques (including drafts)  between the Basel Committee, the International Organization ofSecurities Commissions (IOSCO), and the IAIS  concerning the designation or methodologies used to designate G-SIIs and determine additional capital or other prudential regulatory measures.

Also of note, the letter made note of what is becoming an oft-cited dissent in the young FSOC annals, the argument against the Prudential SIFI designation early last fall by Roy Woodall  the independent member of FSOC with insurance expertise. Woodall, the letter noted, expressed concern that the international and domestic designation processes are not entirely separate and distinct. The Woodall dissent made a point of noting that  an unnamed U.S. national authority” apparently agreed to the international designation of Prudential before the company‘s evidentiary hearing and final determination by the FSOC.

This apparently rankled Hensarling, who was joined by HFSC members Rep. Randy Neugebauer, chair of the Subcommittee on Housing and Insurance,Scott Garrett, chair of the Subcommittee on Capital Markets,  Shelley Moore Capito, chair of the Subcommittee on Financial Institutions and Consumer Credit, Patrick McHenry, chair of the Subcommittee on Oversight and Investigations and  John Campbell, chair of the Subcommittee on Monetary Policy and Trade.

“It is contrary to basic standards of administrative procedure for policymakers to draw conclusions prior to the consideration of relevant facts and public input,” the HFSC  leadership team wrote in their letter.

Treasury and the Fed have previously  repeatedly cleaved to the Dodd Frank Act  language giving them certain process and oversight powers written into Dodd Frank that make the burden to undo or change the process in place very high.

It is unclear why the letter has been sent now, months after much of the designation process work has been underway in the U.S. and abroad. It has been suggested MetLife and the asset managers are bracing for designations they do not want, coupled with some mounting state regulatory concern in the U.S.

Author: Liz Festa

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