GOP report: Feds use 'too big to fail' 'arbitrarily and inconsistently'

GOP report: Feds use 'too big to fail' 'arbitrarily and inconsistently'
© Getty Images

House Financial Services Committee Republicans say the group of feds tasked with tracking financial risk labeled non-bank financial firms too big to fail "arbitrarily and inconsistently."

Lawmakers claimed in a staff report released Tuesday that the Financial Stability Oversight Council (FSOC) didn’t follow consistent standards when labeling four non-bank firms “systemically important financial institutions (SIFIs).”

That designation, nicknamed “too big to fail,” subjects major banks and financial firms to stricter federal oversight. Such banks and firms are considered likely to trigger widespread financial chaos if they were to collapse.


FSOC consists of high-ranking administration officials and regulators across multiple Cabinet agencies, including the Treasury secretary, comptroller of the currency, and chairs of the Federal Reserve Board, Securities and Exchange Commission, Federal Deposit Insurance Corporation, and Commodities Futures Trading Commission.

“The Obama Treasury Department tried to keep Congress and the American people in the dark about how FSOC exercises its sweeping powers,” said Financial Services Committee Chairman Jeb Hensarling (R-Texas) in a statement. “The release of this staff report brings some much-needed transparency and oversight to FSOC.”

The report, based on subpoenaed FSOC documents and interviews with former Deputy Assistant Treasury Secretary Patrick Pinschmidt, claims FSOC officials judged some, but not all, non-bank firms on their importance to the financial system, vulnerability to major shocks and ability to handle financial crises.

The report claims FSOC didn’t follow internal rules when assessing non-bank firms and applied unwritten rules inconsistently.

Republicans have long been critical of FSOC and have sought changes to the way it designates banks and firms as systemically important. They’ve specifically targeted the standards FSOC uses to judge systemic importance and the asset liquidation process FSOC would use to dismantle a failing bank without triggering a crisis.

Republicans say the “too big to fail” label protects firms with a liquidation process they equate to the 2009 bank bailout, though the liquidation process doesn’t give failing firms taxpayer money. A bill to replace the liquidation process with a bankruptcy method passed the House last year.