Yellen exchange on SIFI designations yields more questions than answers


“I believe that the – I have to check this out. I believe that the FSOC designations of these firms (MetLife and Prudential) occurred before the final designations by the FSB, but I have to look back at that more carefully.” – Fed Chair Janet Yellen, 9/28/16

Since 2010 when President Obama signed the Dodd-Frank Act into law, the Financial Stability Oversight Council (FSOC) has had the authority to designate non-banks such as insurance companies as systemically important financial institutions, or SIFIs. But as, Bob Dylan sings, “The times, they are a changin.”

{mosads}A President Trump, along with Republican control of Congress, creates opportunities to bring rationality to the dramatic mis-regulation of the financial sector embodied in Dodd-Frank.  The financial services sector does not need overregulation or under regulation. It needs right regulation. The stakes are high because a SIFI designation raises serious issues with a firm’s position in the marketplace and the types of requirements that would be imposed on it.

That is why the process for designating firms, especially those that are not banks, should be reevaluated.  At the very least, the designation process needs to be reformed so that FSOC carries out its duties in a transparent and deliberative manner by regulators who are accountable to the American people. Unfortunately, I believe the designations of MetLife and Prudential – two major American insurers – were not made in the most transparent manner. It is wholly unclear the extent to which closed-door discussions at the Financial Stability Board (FSB), a global consortium of financial regulators, impacted the FSOC’s SIFI designation process. 

asked Chair Yellen about this issue at a Financial Services Committee hearing last fall. The Fed, a member of both the FSB and FSOC, has repeatedly denied the allegation that domestic regulators merely followed the FSB’s lead. During the hearing, Chair Yellen denied accusations of FSB front-running and defended her assertion by mistakenly claiming that the U.S.-based FSOC designated Prudential and MetLife before the FSB issued its designations. This was simply not true. As we all know, the FSB first listed MetLife and Prudential as globally systemically important insurers (G-SIIs) on July 18, 2013 and it listed them again this year. Then, on Sept. 19, 2013, the FSOC designated Prudential as a SIFI. FSOC later designated MetLife as a SIFI on Dec. 18, 2014. I should add that I provided my questions to Chair Yellen in advance to ensure that she would come to our hearing adequately prepared to discuss this issue.

Allegations of the FSB’s front-running are not purely based on timelines, though the Fed’s apparent ignorance of the sequencing of designations is as telling as it is troubling. The FSOC’s Roy Woodall, the council’s lone insurance expert with voting rights, opposed these designations and argued that the FSB’s designation of U.S. insurers as systemically important had “overtaken the Council’s own determination process” and that U.S. regulators have “allow[ed] the FSB to ‘front-run’ or pressure decisions that must be made first by the [FSOC] as a whole.” This troubling deviation from the procedural protections codified by U.S. administrative law, i.e, a violation of due process, made the FSOC’s designations of Prudential and MetLife inevitable.

Nowhere does existing law authorize any U.S. regulator to cede its authority to a foreign council like the FSB. American regulators should surely participate in international forums and work with their counterparts to protect the stability of the global financial system. But, our regulators must take the lead in writing the rules that govern the American financial system, subject to Congressional direction. Not only is this legally required, it also ensures that the entities writing our rules actually place American interests first. With that in mind, it may concern many that FSB members are explicitly expected to adopt and domestically enact agreed-upon policies. Mark Carney, Governor of the Bank of England and FSB chair called for the “full, consistent and prompt implementation” of the organization’s reforms in a letter to its members. The FSOC’s behavior and Chair Yellen’s posture are entirely consistent with commitments apparently made at the FSB, yet they are at odds with American law and common sense. 

Had FSOC’s designation decisions for MetLife and Prudential been accompanied by a detailed rationale, Congress – and the American people – would be able to judge whether the FSOC made up its own mind or merely rubber-stamped the FSB designation. Unfortunately, that was also not the case. Instead, Congress and the American public are left wondering who really writes the rules.

As we prepare for a re-energized Congress and new leadership in the White House, it’s time to make the necessary changes to Dodd-Frank and at the very least, ensure that American companies are supervised by American regulators, not international bureaucrats based in Brussels or Basel. 

Rep. Keith Rothfus represents Pennsylvania’s 12th District in the U.S. House of Representatives.

The views expressed by authors are their own and not the views of The Hill.


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