“The drafters of the Dodd-Frank Act provided the Financial Stability Oversight Council with new, far-reaching powers over the financial system, and the Council’s use of its new powers will have a profound effect on America’s financial system and our economy overall. I commend Chairman Neugebauer for making oversight of the FSOC a high priority for this Subcommittee. 

“The Dodd-Frank Act statutorily designates banks with $50 billion or more in assets as ‘systemically important.’  Approximately 30 banks are at this level at the present time.  One of the Council’s most significant responsibilities is to determine which non-bank financial institutions will be designated as ‘systemically important’ and therefore subject to heightened prudential standards and Federal Reserve supervision.  That in and of itself is not a bad thing.  However, the moral hazard implications of this designation cannot be overstated. The stamp of ‘systemically important’ will be interpreted by many market participants as a designation of ‘Too Big to Fail,’ prompting them to exercise less market discipline when dealing with such firms.  Federal Reserve Governor Daniel Tarullo concedes that the designation process could exacerbate moral hazard.  In a speech on March 31st of this year, Governor Tarullo stated:  ‘[T]here is a reasonable concern that designating a small number of nonbank-affiliated firms would increase moral hazard concern.’

“Additionally, I have questions regarding the transparency of the process for making these determinations. Both the Council’s Advanced Notice for Proposed Rulemaking and its Notice for Proposed Rulemaking restated language in the Dodd-Frank statute. However, recent testimony from the FDIC Chairman and press reports indicate the Council is using additional standards to make its determinations. The significance of the systemic determination process requires transparency, and the Council should clarify what metrics are being used to classify firms.

“Congress must also ensure that the Council fulfils its statutory duty to coordinate the rulemaking, reporting and enforcement actions of the financial regulators.  It is imperative that the Chairman of FSOC, Treasury Secretary Geithner, directs the Council’s coordination efforts. Secretary Geithner should strive to ensure that the rules implementing Dodd-Frank are neither duplicative nor conflicting.  So far, the results on this front are not encouraging, as regulators seem incapable of developing a coherent or coordinated approach on issues as fundamental as derivatives regulation and mortgage servicing standards. 

           

“Finally, decisions made by the Council must not undermine the competitiveness of U.S. financial firms or treat U.S. firms less favorably than foreign competitors. The Council should be sensitive to how its rules and recommendations impact the ability of American companies to compete globally. The Council should also keep in mind that, in addition to being subject to the Dodd-Frank Act, U.S. firms are also subject to Basel III capital standards as well as rules issued by the Group of 20 and Financial Stability Board.

“The activities undertaken by the Council show it may not be taking this issue as seriously as it needs to.  In response to a query on the international context of the Volcker Rule that was included in the Council’s Request for Information for the Volcker Study, I submitted a comment letter making the point that unilateral U.S. adoption of the Volcker Rule could hurt the U.S. economy and create opportunities for regulatory arbitrage.  This concern was echoed by others.  However, the Council’s final Volcker Study included just one reference to concerns about U.S. global competitiveness, and the Council’s study and recommendations on concentration limits for U.S. firms devoted less than a page to competitiveness concerns.

“I hope the panelists will address these issues today.”