March 25, 2015

Shelby Statement at Hearing on FSOC Accountability

WASHINGTON, DC – Wednesday, March 25, 2015 – U.S. Senator Richard Shelby (R-Ala.), Chairman of the United States Senate Committee on Banking, Housing, and Urban Affairs, today delivered the following opening remarks during a full committee hearing on “FSOC Accountability: Nonbank Designations.”

The text of Chairman Shelby’s remarks, as prepared, is below.  

“Today, the Committee will examine how the Financial Stability Oversight Council, or FSOC, designates certain nonbank companies as systemically important.

“First, we will hear testimony from Treasury Secretary Jack Lew, who chairs the FSOC.  We will then turn to a panel of experts.

“Dodd-Frank established the FSOC to identify and mitigate risks to the financial stability of the United States that may arise from the material financial distress of bank holding companies or nonbank financial companies.

“There is no precedent in our regulatory regime for a council like the FSOC.  Further, when you give such a body extraordinary powers, those powers must be exercised with requisite care. 

“The Council has the authority to designate a nonbank institution as systemically important and subject it to enhanced prudential standards and regulation by the Federal Reserve.

“This new layer of regulation does not come without a cost to our economy – enhanced prudential requirements impose significant costs on banks and nonbank entities.

“Because much rests on an institution’s designation, I believe that the FSOC has a heightened duty to be as transparent and judicious as possible.

“However, the FSOC’s previous designations have been criticized for lacking transparency, failing to produce clear indicators to guide others, and merely following international regulatory bodies. 

“If such criticism has merit, Congress should be concerned because this is not how our regulatory regime ought to function.  Our regulators should be transparent, issue clear guidance and be free from the undue influence of international bodies.

“The Financial Stability Board or FSB is one such international body that monitors and makes recommendations about the global financial system.  The FSB, however, is not a U.S. regulator, and it is not accountable to Congress or the American people.

“Nonetheless, two out of the three insurance companies that the FSOC has designated as systemically important were first designated by the FSB.

“This creates a regulatory conflict because three of the ten FSOC voting members – Treasury, the Fed and the SEC – first engage at the FSB level to determine if a U.S. company is systemically important.

“When they return to the U.S. and supposedly engage with the rest of the Council to consider whether a company is systemically important, they have, for all intents and purposes, already made up their minds.

“We must ask if the influence that the FSB seems to exert over the FSOC process is real and whether it is appropriate.

“An FSOC designation process has little merit if it is merely used to justify an international organization’s determination, rather than engage in an independent analysis.

“Moreover, given that an FSOC designation is a determination of risk to the U.S. financial system, the FSOC should ensure that the steps to mitigate that risk are identified and articulated before a company is designated.

“While the FSOC has announced a series of steps aimed at increasing transparency, most critics do not believe that such efforts sufficiently address the concerns that have been raised. 

“We must therefore ask the following questions: First, has the FSOC clearly disclosed what factors make a company systemically important and the relative weight it has assigned to those factors? 

“Second, is it clear what needs to occur to reduce the systemic risk of such a company?  In other words, does a company know how to avoid designation or know how to be un-designated? 

“Third, is the FSOC designation process sufficiently open, objective, data driven, and free from the influence of outside organizations?

“Today’s panels will hopefully shed some light on these important questions as the Committee considers whether changes to the FSOC process need to be made.”