HFSC Hearing on the Financial Stability Board
House Financial Services Subcommittee on Monetary Policy and Trade
“The Financial Stability Board’s Implications for U.S. Growth and Competitiveness”
Tuesday, September 27, 2016
Key Topics & Takeaways
- FSB Impact: Rep. Robert Pittenger (R-N.C.) asked whether U.S. firms are put at a disadvantage when U.S. regulators follow international standards too closely, given how different the U.S. economy is from the rest of the world in terms of reliance on capital markets. McDowell said the possibility “absolutely exists” because foreign regulators enter discussions with different perspectives, and that total harmonization is impossible because of different legal and corporate structures.
- Transparency: McDowell suggested that transparency would be improved by U.S. regulators conducting notice and comment processes before going into international discussions, and that Congress could call on U.S. regulators to argue for reforms at the international bodies themselves.
- Designation of Mutual Funds: Rep. Mick Mulvaney (R-S.C.) asked what would happen to a mutual fund that is designated as systemically-important. Stevens repeated that capital requirements would make firms less competitive and Federal Reserve supervision would make funds subject to the Fed’s priorities rather than its investors’ interests. He stated that a fund designated by the FSOC would not be too big to fail, but rather “too burdened to succeed.”
Witnesses
- Paul Schott Stevens, President and Chief Executive Officer, Investment Company Institute
- Carter McDowell, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association
- Marcus Stanley, Policy Director, Americans for Financial Reform
- Jonathan Bergner, Assistant Vice President for Federal Policy, National Association of Mutual Insurance Companies
Opening Statements
In his opening statement, Chairman Bill Huizenga (R-Mich.) said the financial crisis demonstrated the interconnectedness and weaknesses of the global financial system, and that the Financial Stability Board (FSB) was created in 2009 with a broad mandate to address its vulnerabilities. While acknowledging that standards agreed to by the FSB’s members are not legally binding, he argued that the FSB does pressure jurisdictions to implement the standards. Huizenga lamented that as the FSB has been “aggressively” designating firms as systemically-important, the Financial Stability Oversight Council (FSOC) has “appeared to rubberstamp” these designations without explaining its decisions. He suggested that the FSOC has “outsourced” its regulatory authority to the FSB, and that the FSB is a “shadowy” regulatory agency that uses a backdoor approach to force European-style regulation on the U.S. financial system.
Ranking Member Gwen Moore (D-Wis.) stated that “nothing is more global” than capital, with large firms holding trillions of assets operating world-wide. Given this, she expressed support for the “overarching goals” of the FSB, calling them “on point.” Moore said the FSB and FSOC have generally moved cautiously and worked with all regulators, and cautioned against going back to a “pre-Dodd-Frank” world.
Testimony
Paul Schott Stevens, President and Chief Executive Officer, Investment Company Institute
In his testimony, Stevens stated that the Investment Company Institute (ICI) supports appropriate regulation and international coordination, but that the FSB’s work is a cause for deep concern particularly as it relates to the possible designation of asset managers as systemically-important. He argued that the FSB, comprised primarily of central bankers and finance ministers, does not understand capital markets and that it is predisposed to applying bank-like standards that would be harmful to asset managers. He further claimed that the FSB’s work “falls far short” of being evidence-based, and that it may be result-oriented with the goal of designating the largest funds.
Stevens expressed further concern about the relationship between the FSB and FSOC, saying that the flawed methodologies of the FSB could lead to FSOC designations and bank capital standards for mutual funds. He urged Congress to push reforms on the FSB process by monitoring the participation of U.S. regulators. He also offered his support of H.R. 1550, the FSOC Improvement Act, to codify improvements to the FSOC designation process.
Carter McDowell, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association
McDowell, in his testimony, said the U.S. financial markets are unparalleled in their size and depth, and that capital markets play a more significant role in the U.S. than anywhere else in the world, with 80 percent of debt financing coming through capital markets and just 20 percent through bank loans. He commented that the industry has worked with regulators to implement top-to-bottom reforms that will rebuild trust in the financial system, and that historically the regulatory process has been transparent with opportunities for public input.
However, McDowell argued that U.S. rules are increasingly originating outside the country through international bodies, and called for improvements to their procedures and transparency. Specifically, he spoke in support of Section 10 of H.R. 3189, the Fed Oversight Reform and Modernization Act, which would require the Federal Reserve to solicit public comments and issue reports as part of the process of negotiating international standards. He stated that Congress can force reforms on the FSB and other international bodies by setting conditions on the participation of U.S. regulators.
Marcus Stanley, Policy Director, Americans for Financial Reform
Stanley testified that the FSB has limited power because it puts out reports and recommendations, not laws and regulations. Because FSB standards are not legally binding, he argued, its direct impact is almost non-existent. He highlighted the need for such a body as a forum for discussion among regulators, but opined that international coordination should not lead to a “one size fits all” approach to regulation. Instead, he said Americans for Financial Reform (AFR) has supported “super-equivalence” for U.S. regulations. He said regulations should be tailored for specific markets and that they should go through public notice and comment processes, and then argued that this is exactly what happens today.
Jonathan Bergner, Assistant Vice President for Federal Policy, National Association of Mutual Insurance Companies
In his testimony, Bergner argued that the provisions of the FSB charter go beyond its stated objectives, and voiced concerns with many of the body’s activities and processes. He bemoaned the lack of a formal process for insurers to communicate their concerns and that no state insurance regulators participate in FSB processes, commenting that this can impose serious costs on the U.S. insurance industry. He also stated that the FSB has undue influence over the FSOC designation process.
Questions and Answers
FSB Impact
Huizenga stated that he believes the FSB has become a “shadow regulatory authority” and pointed out that the American public does not even know the positions taken by U.S. regulators. He then asked if the impact of the FSB is as “benign” as Stanley asserted. Stevens replied that Stanley’s comment that the FSB has no direct impact was an “extraordinary statement,” and that the FSB is not an “idle game.” He argued that the FSB is intended to shape U.S. regulation.
Stanley commented that the fact that there is no indication that the FSOC will designate asset management firms, despite the FSB’s discussions of the matter, shows that U.S. authorities have maintained their authority and that FSB actions alone do not make a difference on the U.S. financial system.
Moore asked if it is appropriate that much of the U.S. regulatory framework starts at the international level, given how different international regulatory bodies are in terms of their transparency, use of cost-benefit analysis, and public comment processes. McDowell reiterated that in the U.S., about 80 percent of lending happens in capital markets, while 20 percent is from bank lending, and that much of the world has the reverse ratio, so foreign regulators have a more bank-centric approach to regulation. He stated that the FSB has an important role, but that almost everything the prudential regulators undertake today comes from international bodies.
Rep. Robert Pittenger (R-N.C.) asked whether U.S. firms are put at a disadvantage when U.S. regulators follow international standards too closely, given how different the U.S. economy is from the rest of the world in terms of reliance on capital markets. McDowell said the possibility “absolutely exists” because foreign regulators enter discussions with different perspectives, and that total harmonization is impossible because of different legal and corporate structures. He also suggested that applying something similar to the Administrative Procedures Act to the FSB would be appropriate.
Huizenga asked about the transparency of the FSB, and McDowell responded that all the work of the FSB is done through committees, and that not even the make-up of these committees is known to the public.
Rep. Mick Mulvaney (R-S.C.) spoke of the need for a clear understanding of the FSB designation process, as well as how firms can be de-designated. He commented that it seems reasonable to expect the FSB to explain its processes, and asked why it has not done so. Bergner answered that “we don’t know” why the FSB has not clearly explained its process, and that it goes back to the question of transparency.
Rep. Denny Heck (D-Wash.), commented that U.S. financial policy should be made in the U.S. by American regulators. He asked whether this process is being adhered to. Bergner stated that there are many reasons to believe U.S. regulators can be doing better. McDowell stressed that there should be notice and comment on what U.S. regulators will do at international bodies.
Pittenger asked whether U.S. policymakers should be concerned about the lack of transparency at international bodies, given the potential of their standards to lock up billions of dollars in credit. He also asked for recommendations to improve transparency. McDowell replied that policymakers “absolutely” should be concerned, and suggested that transparency would be improved by U.S. regulators conducting notice and comment processes before going into international discussions, and that Congress could call on U.S. regulators to argue for reforms at the international bodies themselves.
Public Comments
Huizenga asked Stevens to explain his concerns about the FSB’s public comment process. Stevens answered that while ICI has taken part in FSB consultations and submitted data, it does not seem that this input is taken into account in final proposals. He suggested that the FSB’s processes are “unhinged from any evidence-based approach.”
McDowell added that many times there are material changes in final standards from international bodies that the industry and public have never had an opportunity to comment on, and that there is no second chance to comment on the final proposal.
Mutual Funds
Moore asked about the impact of bank-like capital requirements on mutual funds. Stevens responded that mutual funds made subject to capital requirements would see diminished returns and be rendered less competitive. He warned that designating mutual funds as systemically-important and subjecting them to prudential regulation from the Federal Reserve would change the management and duties of a fund.
Mulvaney commented that calling mutual funds shadow banks is misleading because they are not banks, and asked what would happen to a mutual fund that is designated as systemically-important. Stevens repeated that capital requirements would make firms less competitive and Federal Reserve supervision would make funds subject to the Fed’s priorities rather than its investors’ interests. He stated that a fund designated by the FSOC would not be too big to fail, but rather “too burdened to succeed.”
For more information on this hearing, please click here.
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House Financial Services Subcommittee on Monetary Policy and Trade
“The Financial Stability Board’s Implications for U.S. Growth and Competitiveness”
Tuesday, September 27, 2016
Key Topics & Takeaways
- FSB Impact: Rep. Robert Pittenger (R-N.C.) asked whether U.S. firms are put at a disadvantage when U.S. regulators follow international standards too closely, given how different the U.S. economy is from the rest of the world in terms of reliance on capital markets. McDowell said the possibility “absolutely exists” because foreign regulators enter discussions with different perspectives, and that total harmonization is impossible because of different legal and corporate structures.
- Transparency: McDowell suggested that transparency would be improved by U.S. regulators conducting notice and comment processes before going into international discussions, and that Congress could call on U.S. regulators to argue for reforms at the international bodies themselves.
- Designation of Mutual Funds: Rep. Mick Mulvaney (R-S.C.) asked what would happen to a mutual fund that is designated as systemically-important. Stevens repeated that capital requirements would make firms less competitive and Federal Reserve supervision would make funds subject to the Fed’s priorities rather than its investors’ interests. He stated that a fund designated by the FSOC would not be too big to fail, but rather “too burdened to succeed.”
Witnesses
- Paul Schott Stevens, President and Chief Executive Officer, Investment Company Institute
- Carter McDowell, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association
- Marcus Stanley, Policy Director, Americans for Financial Reform
- Jonathan Bergner, Assistant Vice President for Federal Policy, National Association of Mutual Insurance Companies
Opening Statements
In his opening statement, Chairman Bill Huizenga (R-Mich.) said the financial crisis demonstrated the interconnectedness and weaknesses of the global financial system, and that the Financial Stability Board (FSB) was created in 2009 with a broad mandate to address its vulnerabilities. While acknowledging that standards agreed to by the FSB’s members are not legally binding, he argued that the FSB does pressure jurisdictions to implement the standards. Huizenga lamented that as the FSB has been “aggressively” designating firms as systemically-important, the Financial Stability Oversight Council (FSOC) has “appeared to rubberstamp” these designations without explaining its decisions. He suggested that the FSOC has “outsourced” its regulatory authority to the FSB, and that the FSB is a “shadowy” regulatory agency that uses a backdoor approach to force European-style regulation on the U.S. financial system.
Ranking Member Gwen Moore (D-Wis.) stated that “nothing is more global” than capital, with large firms holding trillions of assets operating world-wide. Given this, she expressed support for the “overarching goals” of the FSB, calling them “on point.” Moore said the FSB and FSOC have generally moved cautiously and worked with all regulators, and cautioned against going back to a “pre-Dodd-Frank” world.
Testimony
Paul Schott Stevens, President and Chief Executive Officer, Investment Company Institute
In his testimony, Stevens stated that the Investment Company Institute (ICI) supports appropriate regulation and international coordination, but that the FSB’s work is a cause for deep concern particularly as it relates to the possible designation of asset managers as systemically-important. He argued that the FSB, comprised primarily of central bankers and finance ministers, does not understand capital markets and that it is predisposed to applying bank-like standards that would be harmful to asset managers. He further claimed that the FSB’s work “falls far short” of being evidence-based, and that it may be result-oriented with the goal of designating the largest funds.
Stevens expressed further concern about the relationship between the FSB and FSOC, saying that the flawed methodologies of the FSB could lead to FSOC designations and bank capital standards for mutual funds. He urged Congress to push reforms on the FSB process by monitoring the participation of U.S. regulators. He also offered his support of H.R. 1550, the FSOC Improvement Act, to codify improvements to the FSOC designation process.
Carter McDowell, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association
McDowell, in his testimony, said the U.S. financial markets are unparalleled in their size and depth, and that capital markets play a more significant role in the U.S. than anywhere else in the world, with 80 percent of debt financing coming through capital markets and just 20 percent through bank loans. He commented that the industry has worked with regulators to implement top-to-bottom reforms that will rebuild trust in the financial system, and that historically the regulatory process has been transparent with opportunities for public input.
However, McDowell argued that U.S. rules are increasingly originating outside the country through international bodies, and called for improvements to their procedures and transparency. Specifically, he spoke in support of Section 10 of H.R. 3189, the Fed Oversight Reform and Modernization Act, which would require the Federal Reserve to solicit public comments and issue reports as part of the process of negotiating international standards. He stated that Congress can force reforms on the FSB and other international bodies by setting conditions on the participation of U.S. regulators.
Marcus Stanley, Policy Director, Americans for Financial Reform
Stanley testified that the FSB has limited power because it puts out reports and recommendations, not laws and regulations. Because FSB standards are not legally binding, he argued, its direct impact is almost non-existent. He highlighted the need for such a body as a forum for discussion among regulators, but opined that international coordination should not lead to a “one size fits all” approach to regulation. Instead, he said Americans for Financial Reform (AFR) has supported “super-equivalence” for U.S. regulations. He said regulations should be tailored for specific markets and that they should go through public notice and comment processes, and then argued that this is exactly what happens today.
Jonathan Bergner, Assistant Vice President for Federal Policy, National Association of Mutual Insurance Companies
In his testimony, Bergner argued that the provisions of the FSB charter go beyond its stated objectives, and voiced concerns with many of the body’s activities and processes. He bemoaned the lack of a formal process for insurers to communicate their concerns and that no state insurance regulators participate in FSB processes, commenting that this can impose serious costs on the U.S. insurance industry. He also stated that the FSB has undue influence over the FSOC designation process.
Questions and Answers
FSB Impact
Huizenga stated that he believes the FSB has become a “shadow regulatory authority” and pointed out that the American public does not even know the positions taken by U.S. regulators. He then asked if the impact of the FSB is as “benign” as Stanley asserted. Stevens replied that Stanley’s comment that the FSB has no direct impact was an “extraordinary statement,” and that the FSB is not an “idle game.” He argued that the FSB is intended to shape U.S. regulation.
Stanley commented that the fact that there is no indication that the FSOC will designate asset management firms, despite the FSB’s discussions of the matter, shows that U.S. authorities have maintained their authority and that FSB actions alone do not make a difference on the U.S. financial system.
Moore asked if it is appropriate that much of the U.S. regulatory framework starts at the international level, given how different international regulatory bodies are in terms of their transparency, use of cost-benefit analysis, and public comment processes. McDowell reiterated that in the U.S., about 80 percent of lending happens in capital markets, while 20 percent is from bank lending, and that much of the world has the reverse ratio, so foreign regulators have a more bank-centric approach to regulation. He stated that the FSB has an important role, but that almost everything the prudential regulators undertake today comes from international bodies.
Rep. Robert Pittenger (R-N.C.) asked whether U.S. firms are put at a disadvantage when U.S. regulators follow international standards too closely, given how different the U.S. economy is from the rest of the world in terms of reliance on capital markets. McDowell said the possibility “absolutely exists” because foreign regulators enter discussions with different perspectives, and that total harmonization is impossible because of different legal and corporate structures. He also suggested that applying something similar to the Administrative Procedures Act to the FSB would be appropriate.
Huizenga asked about the transparency of the FSB, and McDowell responded that all the work of the FSB is done through committees, and that not even the make-up of these committees is known to the public.
Rep. Mick Mulvaney (R-S.C.) spoke of the need for a clear understanding of the FSB designation process, as well as how firms can be de-designated. He commented that it seems reasonable to expect the FSB to explain its processes, and asked why it has not done so. Bergner answered that “we don’t know” why the FSB has not clearly explained its process, and that it goes back to the question of transparency.
Rep. Denny Heck (D-Wash.), commented that U.S. financial policy should be made in the U.S. by American regulators. He asked whether this process is being adhered to. Bergner stated that there are many reasons to believe U.S. regulators can be doing better. McDowell stressed that there should be notice and comment on what U.S. regulators will do at international bodies.
Pittenger asked whether U.S. policymakers should be concerned about the lack of transparency at international bodies, given the potential of their standards to lock up billions of dollars in credit. He also asked for recommendations to improve transparency. McDowell replied that policymakers “absolutely” should be concerned, and suggested that transparency would be improved by U.S. regulators conducting notice and comment processes before going into international discussions, and that Congress could call on U.S. regulators to argue for reforms at the international bodies themselves.
Public Comments
Huizenga asked Stevens to explain his concerns about the FSB’s public comment process. Stevens answered that while ICI has taken part in FSB consultations and submitted data, it does not seem that this input is taken into account in final proposals. He suggested that the FSB’s processes are “unhinged from any evidence-based approach.”
McDowell added that many times there are material changes in final standards from international bodies that the industry and public have never had an opportunity to comment on, and that there is no second chance to comment on the final proposal.
Mutual Funds
Moore asked about the impact of bank-like capital requirements on mutual funds. Stevens responded that mutual funds made subject to capital requirements would see diminished returns and be rendered less competitive. He warned that designating mutual funds as systemically-important and subjecting them to prudential regulation from the Federal Reserve would change the management and duties of a fund.
Mulvaney commented that calling mutual funds shadow banks is misleading because they are not banks, and asked what would happen to a mutual fund that is designated as systemically-important. Stevens repeated that capital requirements would make firms less competitive and Federal Reserve supervision would make funds subject to the Fed’s priorities rather than its investors’ interests. He stated that a fund designated by the FSOC would not be too big to fail, but rather “too burdened to succeed.”
For more information on this hearing, please click here.