Alex Pollock Testimony: FSOC must fix process to designate systemically important nonbanks
WASHINGTON (March 28, 2017) — The Financial Stability Oversight Council’s process for identifying systemically important nonbank financial institutions is beset by politically influenced assumptions and inconsistent analytical processes, R Street Distinguished Senior Fellow Alex Pollock testified today to the House Financial Services Subcommittee on Oversight and Investigations.
Established as part of the Dodd-Frank Act following the 2008 financial crisis, the 15-member council is unwieldy and, because it is chaired by the secretary of Treasury, inextricably bound to broader political considerations, Pollock said. An examination of its record to date in determining whether insurance companies and other nonbank financial services firms should be subject to oversight by the Federal Reserve Board raises additional questions about the fairness and objectivity of the process, he added.
“The whole point of the existence of FSOC is supposed to be the combined substantive deliberation and development of insights by this committee of the heads of financial regulatory agencies,” Pollock said. “But it doesn’t seem to happen. So the designation process does not work well not only at the staff level, but also at the level of the FSOC as a corporate body.”
In particular, Pollock noted that FSOC members voted to designate insurers MetLife Inc. and Prudential Financial as systemically important financial institutions, despite the objections of Roy Woodall, the lone commission member with insurance expertise. He added that questions have been raised about whether those decisions were unduly influenced by the international Financial Stability Board’s deliberations on which firms it would designate as “global systemically important insurers.”
“If Congress wants to have the Federal Reserve Board regulate big insurance companies, it can make it so in statute, using whatever subjective judgments it wants,” Pollock testified. “In my view, FSOC is a distinctly inappropriate body to act as a little legislature.”
Moreover, he questioned why the council had opted not to consider for designation the government sponsored enterprises Fannie Mae and Freddie Mac, which combine for nearly $5 trillion in credit risk, or the Pension Benefit Guaranty Corp., which has a deficit net worth of $76 billion.
“The shortcomings of the designation process reflect the underlying problems with the fundamental design,” Pollock said. “To begin with, FSOC is primarily a group of individuals each representing a regulatory agency, with turf to protect from intrusions by the others, and a regulatory record to defend from criticism, as principal bureaucratic concerns.”
Pollock’s full written testimony can be found here.
