As the Trump administration undertakes a review of Dodd-Frank, the 2010 financial reform law arising from the 2008 financial crisis, I nominate for repeal the parts of the statute that created the Financial Stability Oversight Council (FSOC).
Dodd-Frank created the council of ten federal financial regulators to identify systemic risks and gave it the power to designate large financial services institutions as “systemically significant.”
The council spends taxpayer and industry dollars supposedly searching for perceived risks in the financial system but, instead, has used its designation power to expand federal regulatory power over larger swaths of the U.S. economy.
So far, FSOC has designated 16 banks and four nonbank financial institutions as systemically important. Not surprisingly, shortly after designation, many of those banks entered into settlements with the federal government over housing crisis misdeeds.
Not widely reported is that millions of dollars from those settlements went to housing advocates and other “community organizing” groups aligned with the Obama administration.
Designation subjects the financial institutions to “enhanced supervision" by the Federal Reserve. Famously, JP Morgan still stumbled on the London Whale trade despite such supervision. More recently, Wells Fargo apparently created numerous fake bank accounts to meet sales targets while under enhanced supervision.
The idea that bank regulators will identify risks leading to the next U.S. financial crisis might be more credible if they could even identify day-to-day violations at the designated banks where they have teams of monitors.
FSOC also designated four nonbank companies as systemically significant — AIG, Prudential Financial, MetLife, and GE Capital, the financing arm of General Electric Co.
However, a federal judge threw out the MetLife designation on March 30, 2016, because FSOC failed to make the case, although the order is sealed. Later in 2016, GE Capital got out from under its designation by selling a significant portion of its financial services business.
FSOC includes the Office of Financial Research to provide research on systemic risk issues with a $100,000,000 budget funded by assessments on the industry.
In 2013, OFR issued a research report that served as the basis for FSOC to start an effort to designate asset management firms, like Fidelity and Blackrock, as systemically significant.
The SEC was able to turn back this effort in 2014, but as recently as 2016, the FSOC issued a report about its concerns with hedge fund leverage.
The dilemma for the Trump administration is whether to be content with quieting FSOC for the next four-to-eight years or to try to abolish it. The new Treasury secretary can effectively remove FSOC from the scene by calling fewer meetings and not designating any more financial services firms.
However, this will leave the FSOC available as a tool for a future administration to renew its expansion of federal regulatory power.
A repeal would be the best policy as it would remove this political creation from the federal bureaucracy. If the administration does not have the votes in the Senate to repeal FSOC, then a potential compromise would be to remove the council’s ability to designate financial institutions as systemically significant.
I suspect that such a repeal could attract some Democratic senators. Once a firm is designated, it is actually too big to fail. Although Dodd-Frank bans bailouts and talks about winding up large institutions, does anyone really think that the Fed and FSOC would allow one of the institutions it has designated to fail?
Democrats might be persuaded to support the removal of the designation power to prevent the creation of too big to fail institutions.
However the administration deals with FSOC, another positive step would be to merge some of the alphabet soup of regulators into each other so that the United States has fewer, more targeted regulators.
Mergers of the SEC and CFTC, as well as the Fed and OCC, would reduce the significant gaps among these regulators.
Fewer and more focused regulators could be members of a coordinating committee, similar to the President’s Working Group, that would replace FSOC and enable regulators to share information without the power to designate large firms and seek rents from them.
Norm Champ is the former director of the Division of Investment Management at the Securities and Exchange Commission. He is currently a partner at law firm Kirkland & Ellis LLP. His book, “Going Public” about his experiences at the SEC, is due out from McGraw-Hill Education on March 17th.
The views expressed by contributors are their own and not the views of The Hill.