Chairman Hensarling Once Again Calls on FSOC to “Cease and Desist” Too-Big-To-Fail Designations Until Questions Are Answered
May 20 -
WASHINGTON- House Financial Services Committee Chairman Jeb Hensarling (R-TX) delivered the following opening statement at today’s full committee hearing on the Financial Stability Oversight Council:
The committee’s hearing today is on the Financial Stability Oversight Council—which like most Washington bureaucracies has come to be known by its acronym “FSOC.”
FSOC was established—or so its supporters tell us—to make it easier for regulators to communicate and share information with each other. But the regulators didn’t need an act of Congress to do that, and information-sharing is not what FSOC is really about. Instead, FSOC is about one thing: increasing Washington’s control over the U.S. economy thus curtailing both economic freedom and economic prosperity. And FSOC does this through its power to designate “Systemically Important Financial Institutions”—or, in bureaucrat-speak, “SIFIs.”
Having failed to prevent the last financial crisis, notwithstanding having every regulatory power necessary to do so, regulators were rewarded with even more power by the Dodd-Frank Act. The Dodd-Frank Act represents a breathtaking outsourcing of legislative power to the executive branch. Federal agencies now have virtually unfettered discretion to expand their regulatory control through a designation process that is opaque, secretive, vague, open-ended, and highly subjective.
And by empowering FSOC to designate SIFIs, Dodd-Frank allows the Federal Reserve to impose bank-like standards on non-bank institutions; in other words, to move institutions from the non-bailout economy to the bailout economy.
And that’s what FSOC is doing—expanding the Fed’s power to control the financial system using the pretext that size alone poses a “systemic risk.” Rather than offering up detailed data and analysis to justify its efforts to commandeer large financial institutions, FSOC’s perfunctory explanations are typical of an unaccountable group of agencies that feels it need not justify their actions to anyone.
Many think it odd that FSOC has chosen insurance companies and asset managers as targets for SIFI designation when there are others that pose far greater risks to financial stability. Insurance companies are heavily regulated at the state level, and asset managers operate with little leverage. And since they manage someone else’s funds, it is almost inconceivable that an asset manager’s failure could cause systemic risk.
In contrast, there were Fannie Mae and Freddie Mac, which lay at the epicenter of the financial crisis. They were highly-leveraged before the crisis and remain highly-leveraged today. They are not only a source of systemic risk—they are its very embodiment.
Then there is the federal government itself as I look at the national debt clock to my left and to my right. Having borrowed upwards of $17 trillion, it is perhaps the most leveraged institution in world history. Like charity, perhaps “SIFI” designations should begin at home.
Americans should also be worried that FSOC seems take its directions from an international organization that meets secretly– the Financial Stability Board.
Though the U.S. is “represented”—and I use that word advisedly — on this international board by the Treasury Department, the Federal Reserve, and the Securities and Exchange Commission, neither Treasury nor the Fed nor the SEC has ever reported to Congress about its participation, nor have they ever asked for Congress’s approval to participate in this global organization.
While Administration officials are fond of invoking the risks that supposedly lurk in the so-called “shadow banking system,” a great risk also lurk to U.S. financial stability and competitiveness in a shadow regulatory system, in which Treasury and the Federal Reserve may have ceded U.S. sovereignty over financial regulatory matters to a secretive, unaccountable coalition of European bureaucrats. Just days ago, in this very hearing room, Secretary Lew refused to answer key questions regarding Treasury’s participation in the FSB designation process.
To most Americans, the “SIFI” designation process may seem like a classic inside-the-beltway exercise but the stakes are enormous. Designation anoints institutions “too big to fail.” Today’s designations are tomorrow’s taxpayer-funded bailouts. Americans may find themselves paying more to insure their homes and their families. Investors who relied on mutual funds to save for their children’s education or their own retirement will find they’ve earned less. And our economy will suffer as sources of long-term investment capital dry up.
I once again call on FSOC to cease and desist further SIFI designations until Congress can review the entire matter.