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Regulators Should Help Firms Reduce Risk, Prevent Crises

January 18, 2018 - 6:00am

During a hearing late Wednesday, U.S. Rep. Dennis Ross, R-Fla., senior deputy majority whip and a member of the U.S. House Financial Services Committee, noted that regulators need to work more closely and less antagonistically with financial firms to avoid future calamities. The comments came during a mark-up of his bill, the Financial Stability Oversight Council Improvement Act of 2018. Ross said the following:

When folks back home save for retirement, college, or a down payment on a house, they expect that the system is both safe and geared towards maximizing their benefit.

A beautiful thing about America’s free enterprise system is how anyone can participate in the marketplace, strengthen the economy, and earn a dividend of the American dream.

I think we all agree that’s how it should be. But I think we all know it’s not.

Today we’re looking at one way it’s not, and how we can fix it. I have in mind Dodd-Frank’s Financial Stability Oversight Council (FSOC), tasked with identifying risks to U.S. financial stability and responding to emerging threats to that stability.

This mission sounds good. It is good. But it hasn’t worked well for a simple reason: If the purpose of FSOC scrutiny is to help ensure that companies don’t pose a systemic threat to our financial system, regulators need to work with them to understand and ultimately mitigate identified or potential risks.

Unfortunately, Dodd-Frank implemented a hasty process and created an adversarial relationship between FSOC, the primary regulators, and businesses, which has imposed harmful and unnecessary costs on our economy.

Yet, because no one is immune to the consequences of a financial meltdown, all stakeholders have an interest in working together to prevent a crisis before it occurs. Thus, the more effective approach to addressing risk is a symbiotic or cooperative one.

I believe FSOC operates at its best when it works with prudential regulators and the private sector to address threats to our economy before they transform into calamities.

Simply designating more companies as systemically important financial institutions doesn’t make our system safer.

Would you say that it’s sufficient for firefighters to identify a house that’s on fire? Of course not. The key is preventing the fire in the first place.

This is the problem we face with the FSOC’s oversight of nonbank financial institutions.

FSOC is really good at identifying tinderboxes, but fails to explain how they might be made less flammable, and instead the Council defaults to what should be the heavy-handed regulations of last resort.

To be sure, the FSOC has begun to recognize the benefits of leveraging the expertise of prudential regulators as well as providing increased transparency.

In recent years they’ve taken steps to improve the designation process, including their February 2015 guidance providing increased transparency in the SIFI designation process.

These 2015 reforms were welcome, and this legislation will codify many of them into law, as well as provide a path for a company to eliminate risk rather than be designated.

Importantly, our legislation will ensure a company’s primary regulator has a meaningful role in the SIFI designation process.

After 8 years, if we don’t take steps to address the obvious shortcomings of the FSOC, like the nonbank designation process, the regulator intended to protect financial stability could very well become a liability.

The American Action Forum has found that additional capital requirements resulting from a SIFI designation of asset management firms could cost American retirees at least $100,000 in potential savings over the lifetime of their investments.

That’s why the reforms included in H.R. 4061 are critical to the more than 90 million investors who rely on the services of asset management firms to achieve their most important financial goals.

Companies must have a chance to de-risk before the FSOC can saddle their customers with such extraordinary losses.

I am proud to have worked with my colleague and friend Rep. John Delaney on this strongly bipartisan piece of legislation, and I want to thank the Chairman for his support and leadership in moving this bill through our committee.

This bill demonstrates that there can be broad, bipartisan support for increased transparency of the FSOC designation process.

I believe we can do even more, and welcome the opportunity to work with my colleagues on additional bipartisan reforms, beyond those we are considering today, to better address systemic risk by firming up the cooperative relationship between the Council and a company’s primary regulator to ensure substantive engagement that can result in swift resolution of FSOC’s concerns prior to a SIFI designation.

With that, I want to once again thank Chairman Hensarling for bringing H.R. 4061 up for this markup, and I yield back my time.

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