19 May 2014

Risk.net: US congressional committee blasts SIFI designation process

The US House of Representatives Committee on Financial Services sent a letter on May 9 to secretary Jacob Lew of the US Treasury; Janet Yellen, chair of the Federal Reserve; and Mary Jo White, chair of the US Securities and Exchange Committee (SEC), requesting they disclose by May 16 every communication in their possession relating to the designation and methodologies used to designate and regulate G-SIFIs.

The committee's demands are a response to growing concerns among both Republican and Democrat members of Congress, insurance regulators and firms over the role the FSB plays in influencing the process in the US for designating SIFIs. Under the Dodd-Frank Act, an independent Financial Stability Oversight Council (FSOC) was established for this purpose.

However, members of the Financial Services Committee believe the FSOC is taking its cues from the FSB rather than defining a designation methodology of its own. The Treasury secretary, chair of the Federal Reserve and chair of the SEC all sit on both the FSB and FSOC. 

In the letter the committee members describe the FSB as an international "old boys' club" invested with "sweeping power" despite having "no authority under US law of treaty". The way in which the board classifies firms as systemically important is criticised as "a black box".

The committee's criticisms are shared by domestic insurance regulators. Director John Huff of Missouri, who also serves as a non-voting member on the FSOC, says: "I, along with many other state insurance regulators, am concerned about the lack of transparency in how the FSB designates non-bank G-SIFIs. The reasoning is opaque to me and my fellow state regulators, who regulate such firms. I believe these are fair questions for the House Committee to seek answers to as it carries out its oversight mission."

US lawmakers' attacks on the role of the FSB in global financial regulation have increased in recent weeks. Observers say the debate over SIFIs has grown more heated as the November congressional elections approach.

On the designation process itself, Don Lamson, head of the Washington, DC, regulatory practice at law firm Shearman & Sterling,suggests the House Committee is being uncharitable to the FSOC. "The council goes through a three-stage process when designating a non-bank SIFI. In the first stage they run a filter in terms of size, in the second they run in-depth investigations in cooperation with the insurer, and in the third the council deliberates among itself and makes a final decision based on its findings."

The council's designation process is laid out in the Dodd-Frank Act, including the criteria for designation. The FSOC's designation methodology is also publicly available on its website for review. It is unclear what further transparency the House Committee wishes to see. But Lamson says the publicly available information is cursory. "Frankly if you look at the designations of Prudential and AIG themselves, there really isn't a lot of space devoted to the analysis of why they were branded SIFIs. This may have prompted some of the criticism."

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