New President Could End FSOC, Designation Powers
November 19, 2016 by Frank Klimko
WASHINGTON – A Donald Trump administration could end the Financial Stability Oversight Council as a regulatory body and unwind the systemically important financial institution designation process that has exposed insurers to higher levels of prudential supervision, market watchers said.
“FSOC as we know it will not survive the incoming administration and Congress, nor will the SIFI experiment,” Justin Schardin, director of the Bipartisan Policy Institute Financial Regulatory Reform Initiative, told Best’s News Service.
“And since designating SIFIs is FSOC’s only significant power,” Schardin said, “it’s not clear what else the council will do beyond the basics of providing a forum for its members to meet and monitor financial stability.”
The council was given the mission of preventing the corporate risk taking that sparked the financial crisis in 2008.
Moves to address the SIFI designation process would be welcomed by the industry, trade representatives said.
“We see no justification for the designation of property/casualty insurers or reinsurers as globally systemic or domestically systemic,” Dave Snyder, Property Casualty Insurers Association of America vice president, international policy, told Best’s News Service. “In our view, property/casualty insurers are not systemic considering how comprehensively they are regulated and how competitive the property/casualty markets are.”
“Certainly, that particular element in the FSOC should go away,” Snyder said.
Wes McClelland, American Insurance Association vice president of federal affairs, agreed.
“The biggest issue was the lack of transparency,” he said. “It was never transparent on how one became a SIFI and more importantly how you get de-designated and the steps after that.”
As a candidate, Trump laid out few specific policy proposals on financial regulation, so it is difficult to know exactly what the future of financial regulation will be under the newly elected president, Schardin said.
The SIFI designation of nonbanks, like insurers, has been contentious from the start, with critics claiming the process was unfair, Schardin said.
The only two remaining insurance SIFIs are American International Group Inc. and Prudential Financial Inc. A third, MetLife Inc., shed its designation earlier this year through litigation (Best’s News Service, Nov. 10, 2016). Attorneys for the council have appealed that ruling, but any such appeal will probably be made moot with the appointment of a new U.S. Treasury Secretary, said Ian Katz, director of Capital Alpha Partners.
“The appeals case is aimed at allowing the FSOC to redesignate MetLife,” Katz said. “But an FSOC chaired by a Trump-chosen Treasury Secretary won’t want to redesignate MetLife.”
The new FSOC would likely move to rescind its existing designations, Katz said.
“Although it probably won’t happen in the first several months of a Trump administration, we believe that the FSOC under a Trump Treasury will de-designate AIG and Prudential,” Katz said in a note to clients. “The Treasury Secretary sets FSOC’s priorities and agenda. This process could take many months because it would be difficult to do without new regulators on the council.
“The FSOC is required to have an annual review of each company’s designation, and could decide to rescind the SIFI tag during that review,” Katz said.
The authority of the FSOC could also be addressed directly through legislation. The House Financial Services Committee, on a party line vote, in September approved the Financial Choice Act (H.R. 5983). It would explicitly revoke FSOC’s ability to designate SIFIs and retroactively remove SIFI status from firms that have already been designated.
Also, the bill would require financial regulators conduct a detailed cost-benefit analysis of all proposed regulations. And, it would close down the Office of Financial Research, an independent U.S. Treasury Department entity that provides economic research (Best’s News Service, Sept. 14, 2016).
That bill could be used to construct a comprehensive Dodd-Frank replacement measure for the new 115th Congress, but lawmakers likely would want to re-evaluate the legislation to see if it workable in the new political environment, Schardin said. And, any replacement measure would still have to overcome a filibuster threat in the Senate where Dodd-Frank remains popular with Democrats.
“There will be less of a regulatory burden but we don’t know how much less,” Schardin said. “There is more of a sense that markets should generally be allowed to work.”
(By Frank Klimko, Washington correspondent, BestWeek: Frank.Klimko@ambest.com)
