On FSOC nonbank designation guidance, senators take differing views (with talk of regulatory structure)

Senators both supported and criticized proposed guidance about designating nonbank financial firms as “systemically significant” during a hearing Thursday.

The hearing by the Senate Banking Committee focused on the Financial Stability Oversight Council (FSOC) and its recently issued, proposed guidance on designating nonbank financial institutions as “systemically important financial institutions” (SIFIs). Last week, FSOC proposed an “activities-based approach” to identifying and addressing potential risks to financial stability from the nonbank financial companies. The guidance (which is open for comment for 60 days), according FSOC Chairman (and Treasury Secretary) Steven Mnuchin, would make “significant improvements” to how FSOC settles on which firms will receive the designation.

Committee Chairman Mike Crapo (R-Idaho) agreed with that estimation. In his opening remarks, he said the council’s proposal was a step in the right direction. However, he indicated that improvements were still necessary to the designation process.

Ranking Member Sherrod Brown (D-Ohio), however, said “today, FSOC appears to be closed for business.” He said the proposed guidance shifts the burden back to the primary regulators to identify and solve systemic risk – a shift, he said, to “these same primary regulators that failed to identify the risk that led to the worst financial crisis since the Great Depression.” He also noted what he called staff cuts to the council by the Treasury Department, suggesting that has weakened the organization.

At the conclusion of the hearing, Crapo offered an ominous view of the regulatory structure overall. “We do need to seriously look at what the regulatory structure, system and authorities are to effectively focus on risk and the appropriate level of regulation.”