Senators Grill Treasury Chief on Financial Council

WASHINGTON –Treasury Secretary Jacob Lew strongly defended the work of the Financial Stability Oversight Council (FSOC) Wednesday at a congressional hearing.

“Today, because of the passage of Wall Street reform nearly five years ago, the financial system is more robust and resilient than it was before the crisis,” Lew said. “We have reduced overall leverage in the banking system. Banks have added over $500 billion of capital since the crisis to serve as a buffer for absorbing unexpected losses, and the recently completed annual stress tests cover a wide swath of institutions, illustrating that our largest banks have sufficient capital to withstand adverse shock scenarios and continue to lend to businesses.”

His comments were in stark contrast to those of committee members and industry officials, whose questions and comments appeared to focus on having Lew tell them who held the key to getting out of FSOC jail.

The comments came during a hearing by the Senate Banking Committee on, “FSOC Accountability: Nonbank Designations.”

Senators also questioned whether the FSOC should be an independent agency and whether oversight by the Federal Reserve Board should be put on hold if an institution challenges the designation, as in the case of MetLife. That was strongly proposed in testimony following Lew’s appearance by Gary Hughes, executive vice president and general counsel of the American Council of Life Insurers (ACLI).

The focus on an exit strategy was articulated best by Sen. Mark Warner, D-Va., who told Lew that it was the view of most of the senators attending the session that in creating the FSOC, “there was no intent to create a Hotel California provision,” citing a song by the Eagles that laments the fact that you “check out any time you like, but you can never leave.” This is particularly so, he says of many of the firms who have been designated by the FSOC as systemically significant (SIFI), “particularly the non-bank financials,” such as insurance companies.

Lew, however, said that is not the case.

He first commented on the issue when asked about it by Sen. Elizabeth Warren, D-Mass. “It's not like you're designated and we never look again,” Lew said. “It's an annual review.”

In answering Warner’s question, Lew said that, “I think that the test will come over time as firms think through what the supervisory process means, and make the business judgments as to whether or not they want to change their business in order to have the annual review reach the conclusion that they should be de-designated. It was never meant to be a process that only could go one way. And I think even the early designations give the kind of analysis that firms understand the basis of what they would have to change in order for the annual review.”

He also said that under new procedures the FSOC has created, the agency “will provide companies with a clearer and more robust annual review process.” Lew said that, “This will open the door to more engagement with FSOC following a designation to make sure there's ample opportunity to discuss and address any specific issues that a company wants to put before the FSOC.”

The comments seemed to reassure Warren, whose state is the home of one of the largest non-banks, Fidelity Investments, based in Boston. The concerns about designation of asset managers were later expressed by Paul Schott Stevens, president and CEO of the Investment Company Institute, which represents mutual funds such as Fidelity.

“So, the FSOC designation process is critically important to ensuring the safety of our financial system and guarding against another crisis,” Warren said.

“I think it is important to recognize that designation can achieve that outcome by encouraging companies to change their structure or the operation,” Warren said, adding that, “I'm glad FSOC is permitted to working with companies to make sure that they can accomplish that alternative result.”

The issue of delaying Fed oversight was raised by Sen. Richard Shelby, R-Ala., chairman of the committee.

Shelby asked, "If they're unsuccessful contesting the FSOC’s decision, would you oppose a statutory process to allow a firm, working with the FSOC, to avoid the designation before the designation is made final? In other words, give them a chance to work their problems out?”

Lew, however, quickly rejected that: “I think that in its wisdom, Congress created a process for these matters to be decided and resolved and adjudicated. And that process should stand.”

Sen. Bob Corker, R-Tenn., asked Lew if the FSOC should be an independent agency.

Lew responded by saying, “I think bringing somebody independent in to do it is not necessarily going to lead to a better, more cohesive result.”

Lew said that, “Coordinating independent regulators is going to be a challenge for whoever chairs the FSOC because they each have an independent charter and they each have independent responsibility.

“And, I may bring my own unique perspective to this, having been in a coordinating role in other jobs. I think it behooves whoever is chair, whatever their position is, to be respectful of that independence, but also driving towards a common understanding of where risks are and what actions need to be taken,” Lew said.

Moreover, he said, “I'm actually pretty proud of the work that FSOC has done in a short period of time. So I would not be in a rush to to make a change like that.”

InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].