Tuesday, March 28, 2017

House Committee Hearing Examines SIFI Designation Process

Hears Testimony on FSOC's "Inconsistent and Arbitrary" SIFI Designation Process

The House Oversight and Investigations Subcommittee held a hearing on Tuesday, March 28, 2017 to examine the process used by the Financial Stability Oversight Council (FSOC) to designate systemically important financial institutions (SIFIs). The subcommittee heard testimony from a panel of witnesses about the designation process and about the House Financial Services Committee’s February 28, 2017 report criticizing the FSOC and what it termed its “inconsistent and arbitrary” SIFI designation process. 


The witnesses testifying at the hearing were:



In a statement opening the hearing, Subcommittee Chairman Ann Wagner (R-MO) said, “Dodd-Frank doubled down on the failed lessons of the financial crisis by creating the Financial Stability Oversight Council, enshrining ‘too big to fail,’ and further empowering bureaucrats who have continually side-stepped transparency and accountability while imposing arbitrary rules and back-room regulations on American taxpayers.”  The testimony of the witnesses tended to echo Chairman Wagner’s thoughts on the FSOC and supported the conclusions of the Financial Services Committee’s report:


“Apparently some companies are evaluated by the FSOC based on a subjective judgement about the financial stability impact of the firm’s failure in a normal market, whereas other institutions are judged according to the impact their failure may have when financial markets and the economy are in turmoil. The documents clearly show that the FSOC has not evaluated all firms it has examined under a common standard or using uniform assessment criteria.”

Paul H. Kupiec, Resident Scholar, American Enterprise Institute


“Even if FSOC were following the rules and designating non-bank financial companies fairly, consistently and with good reason -- which the Committee’s report suggests in not always the case -- the process FSOC has developed to designate non-bank financial companies as SIFIs can disrupt markets and impose unnecessary regulatory burdens and costs that outweigh its benefits to the economy.  So despite slight improvements made two years ago, FSOC’s process is still fatally flawed.”

Douglas Holtz-Eakin, President, American Action Forum


“The staff paper of FSOC’s evaluations of possible SIFIs, those recommended for designation and those not, details the inconsistencies in treatment. But these differences pale beside the huge discrepancy of those companies chosen for evaluation and those companies not evaluated at all, because the previous Treasury Secretary did not approve their being studied. So the FSOC staff did not even analyze them because of some higher, prior, political judgment. I think this could fairly be characterized as desperately wanting to ‘see no evil’ when it comes to the systemic financial risk of some entities.”

Alex J. Pollock, Distinguished Senior Fellow, R Street Institute

A video archive of the hearing is available via: http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=401642