Senate Banking Subcommittee on FSOC SIFI Designation
Senate
Banking Subcommittee on Securities, Insurance, and Investment
“Oversight of the Financial Stability Oversight Council
Designation Process”
Wednesday, July 22,
2015
Key
Topics & Takeaways
-
Designation Off-Ramp:
FSOC’s Pinschmidt said there should “absolutely” be an off-ramp that allows a
company to be de-designated as a SIFI.
-
Changes to Designation
Process: Pinschmidt said it is important to “allow the supplemental
changes to work through” and that legislation to extend the designation process
from two to four years would make the FSOC’s analysis unworkable and hamper its
ability to identify and address risks.
-
Impact of Designation:
Sen. Donnelly (D-Ind.) said annual returns of mutual funds invested in by
everyday Americans will be reduced if these funds are designated as
systemically important. Pinschmidt said studies that hypothesize about the
consequences of a designation are “based on faulty data” and do not “reflect
the record of where the Council is focused.”
-
FSOC Opacity:
Sen. Toomey (R-Pa.) said the opacity with which the FSOC operates is “extremely
disturbing” and that there should be an objective and public description of the
activities that the FSOC believes give rise to systemic risk
Witness
- Patrick Pinschmidt,
Deputy Assistant Secretary for the Financial Stability Oversight Council
Opening Statement
Subcommittee
Chairman Mike Crapo (R-Idaho), in his opening statement, said the Financial
Stability Oversight Council (FSOC) lacks accountability and transparency and
expressed concern that the FSOC’s process for designating firms as systemically
important financial institutions (SIFIs) does not provide enough opportunity
for companies to correct or contextualize their financial activities. He
stressed the need for an “off-ramp” for companies to be “de-designated.”
Witness Testimony
Patrick
Pinschmidt, Deputy Assistant Secretary for FSOC, in his testimony,
stated that the Council should be open to input from stakeholders and noted
that the FSOC has: 1) enhanced its level of transparency; 2) strengthened its
internal governance; 3) approved supplemental procedures for the non-bank SIFI
designation process; and 4) solicited comments on risk posed by activities and
products of asset managers.
Pinschmidt
explained that the FSOC will notify companies when they first come under
“active review” so that they can have discussions with FSOC staff during the
process. He added that the FSOC now provides companies with a clearer annual
review process and explained that each designated firm has the opportunity for
an oral hearing to contest its designation every five years.
Pinschmidt
said that as Congress considers making changes to the designation process, it
is important not to harm the FSOC’s ability to address threats to the financial
system. He expressed concern with a proposal to lengthen the designation
process, saying it would impose hurdles, and noted that the Administration will
not support legislation that weakens taxpayer and investor protections.
Question and Answer
Stages
of the Process
Crapo
began the discussion by asking at what point in the designation process a
company is informed of the risks that the FSOC believes it poses and what items
the FSOC staff is concerned about. Pinschmidt said companies get a sense of the
material that the FSOC is reviewing during stage two of the designation
process, but said it is “not practical to assume” that the FSOC will have
developed firm views on the risks a company poses during stage two. He
said a rationale for the designation, explaining the risks of a firm, is
provided at the beginning of stage three.
Crapo
asked how many firms have moved onto the third stage but not been designated.
Pinschmidt noted that of the nine firms that have been considered by the FSOC,
five of them advanced to stage two, and four of them have advanced to stage
three, adding that these four firms were all ultimately designated.
De-Designation
Subcommittee
Ranking Member Mark Warner (D-Va.) said there needs to be a de-designation
process and stated that underlying activities of money market funds should be
the guiding factor of potential designations, and not size. He then asked how
the FSOC monitors the transfer of risk in situations like that of GE Capital,
which plans to spin off its financial activities, and if the FSOC and Federal
Reserve (Fed) have tools to address concerns of “de-risking.” Pinschmidt said
the FSOC is “well positioned” to bring together regulators across the markets
to monitor the migration of assets, adding that the FSOC wants to be as transparent
as possible to allow firms to make de-designation decisions.
Sen.
Bob Corker (R-Tenn.) said areas where there can be consensus on improving the
FSOC’s process include: 1) disclosure prior to designation; 2) providing a
pre-designation off-ramp; and 3) providing a post-designation off-ramp. He then
asked if the FSOC would cease considering designation if a company “unloads its
financial arm.” Pinschmidt said the FSOC “will always consider
information or requests,” but noted that, for the designated firms, no one
specific factor was the determinant for designation.
Sen.
Joe Donnelly (D-Ind.) asked if the FSOC has made a list of things that they are
concerned about, saying that a company cannot know what activities to avoid if
they do not know which ones cause concern for the FSOC. Pinschmidt said the
FSOC has not finished its process of understanding whether there are legitimate
risks in certain activities and noted that the Council is currently engaging
with industry to assess liquidity and redemption risk, leverage, operational
risk, and resolution.
Sen.
Dean Heller (R-Nev.) asked if no firm should ever be de-designated. Pinschmidt
said “certainly not” and that there is a clear process in place for
de-designation.
Heller
responded that the de-designation process is not clear. Pinschmidt replied that
the FSOC provides companies with 200-300 pages of documents explaining why the
designation decision was made and that the process allows for dialogue. He then
added that dialogue is a “precursor to action.”
When Crapo asked if there should be an off-ramp, Pinschmidt
said “absolutely,” noting that if a firm pursues an off-ramp strategy “there is
a path” but that it is not a simple endeavor. He added that are “multiple
lanes” for an off-ramp and that a company should be able to chose the lane it
wishes to use.
Crapo
asked at what point there should be an opportunity for an off-ramp. Pinschmidt
said that if there is a specific area that the FSOC is focusing on, then a
company would know about it “long before” the designation documentation is
sent.
Insurance
Warner
asked how insurance companies can pose systemic risk. Pinschmidt said the FSOC
looked at the broader exposure to financial markets of the three insurance
firms they designated, stressing that the designation was due to operations
other than “vanilla insurance operations.”
Financial
Stability Threats
Donnelly
asked what the FSOC sees as emerging threats in the economy. Pinschmidt said
“cybersecurity remains at the top of everybody’s list” and noted the importance
of fostering information sharing between the public and private sectors. He
also said the FSOC is monitoring practices of reaching for yield, risks
contained in central clearinghouses, and emerging market structures across
asset classes.
Mutual
Funds
Donnelly asked where the systemic risk lies in mutual funds. Pinschmidt said
traditional mutual funds are a “different animal” in the way they invest,
noting that they do not have a balance sheet or leverage and that they act as
an agent investing other people’s money. He noted, however, that there has been
“incredible change” in the mutual fund space and that the FSOC has questions on
exchange traded funds (ETFs) and liquidity features of certain products.
Entity
vs. Activity
Sen.
Tim Scott (R-Ga.) said it is highly unlikely that asset managers pose systemic
risk and asked if the FSOC will revisit the designation of insurers to take an
activity-based approach rather than an entity-based approach. Pinschmidt said
the “larger question” of looking at entities and activities is
not an “either/or” question and that “neither approach precludes other
options.”
Sen.
Pat Toomey (R-Pa.) asked if entity based designations are “still on the table”
and if it is still possible for asset managers to be designated as SIFIs.
Pinschmidt clarified that he was “responding generally” in his previous answer.
He stressed that the FSOC has been evaluating risk in the asset management
space for “some time” and that the Council has directed staff to prioritize a
review of products and activities.
When
further pressed by Toomey on whether the FSOC has taken entity-based
designations for asset managers off the table, Pinschmidt said he “cannot
speak” to whether the FSOC “will do down the road” but said it is “firmly
focused” on activities and products, noting that there is recognition that the
asset management industry “is different.”
Toomey said the opacity with which the FSOC operates
is “extremely disturbing” and said there should be an objective and public
description of the activities that the FSOC believes give rise to systemic
risk.
Fed
Regulation
Toomey
asked if the FSOC can assure that no firm will be designated until the Fed
describes how it will regulate the designated activities. Pinschmidt said the
role of the FSOC and the role of the Fed are very different, noting that the
FSOC identifies risks and the Fed decides how to regulate these risks, adding
that there is “some sequencing there.” He said the Fed recognizes that each
industry and firm is different and that it tailors enhanced prudential
standards to the identified risks and firms.
Changes to Process
Warner
asked why the changes in the supplemental procedures should not be codified,
commenting that a future Treasury Secretary could “veer off” the process in
place. Pinschmidt said it is important to “allow the supplemental changes to
work through” and said legislation to extend the designation process from two
to four years would make the FSOC’s analysis unworkable and hamper its ability
to identify and address risks.
Impact
of Designation
Donnelly
said annual returns of mutual funds invested in by everyday Americans will be
reduced if these funds are designated as systemically important because a
portion of the invested money will have to be set aside. Pinschmidt stressed
that the FSOC is not focused on individual mutual funds and that he does not
think “anybody would want to see bank-like standards imposed on companies that
do not have bank characteristics.” He added that studies that hypothesize about
the consequences of a designation are “based on faulty data” and do not
“reflect the record of where the Council is focused.”
For
more information on this hearing, please click here.
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Senate
Banking Subcommittee on Securities, Insurance, and Investment
“Oversight of the Financial Stability Oversight Council
Designation Process”
Wednesday, July 22,
2015
Key
Topics & Takeaways
-
Designation Off-Ramp:
FSOC’s Pinschmidt said there should “absolutely” be an off-ramp that allows a
company to be de-designated as a SIFI.
-
Changes to Designation
Process: Pinschmidt said it is important to “allow the supplemental
changes to work through” and that legislation to extend the designation process
from two to four years would make the FSOC’s analysis unworkable and hamper its
ability to identify and address risks.
-
Impact of Designation:
Sen. Donnelly (D-Ind.) said annual returns of mutual funds invested in by
everyday Americans will be reduced if these funds are designated as
systemically important. Pinschmidt said studies that hypothesize about the
consequences of a designation are “based on faulty data” and do not “reflect
the record of where the Council is focused.”
-
FSOC Opacity:
Sen. Toomey (R-Pa.) said the opacity with which the FSOC operates is “extremely
disturbing” and that there should be an objective and public description of the
activities that the FSOC believes give rise to systemic risk
Witness
- Patrick Pinschmidt,
Deputy Assistant Secretary for the Financial Stability Oversight Council
Opening Statement
Subcommittee
Chairman Mike Crapo (R-Idaho), in his opening statement, said the Financial
Stability Oversight Council (FSOC) lacks accountability and transparency and
expressed concern that the FSOC’s process for designating firms as systemically
important financial institutions (SIFIs) does not provide enough opportunity
for companies to correct or contextualize their financial activities. He
stressed the need for an “off-ramp” for companies to be “de-designated.”
Witness Testimony
Patrick
Pinschmidt, Deputy Assistant Secretary for FSOC, in his testimony,
stated that the Council should be open to input from stakeholders and noted
that the FSOC has: 1) enhanced its level of transparency; 2) strengthened its
internal governance; 3) approved supplemental procedures for the non-bank SIFI
designation process; and 4) solicited comments on risk posed by activities and
products of asset managers.
Pinschmidt
explained that the FSOC will notify companies when they first come under
“active review” so that they can have discussions with FSOC staff during the
process. He added that the FSOC now provides companies with a clearer annual
review process and explained that each designated firm has the opportunity for
an oral hearing to contest its designation every five years.
Pinschmidt
said that as Congress considers making changes to the designation process, it
is important not to harm the FSOC’s ability to address threats to the financial
system. He expressed concern with a proposal to lengthen the designation
process, saying it would impose hurdles, and noted that the Administration will
not support legislation that weakens taxpayer and investor protections.
Question and Answer
Stages
of the Process
Crapo
began the discussion by asking at what point in the designation process a
company is informed of the risks that the FSOC believes it poses and what items
the FSOC staff is concerned about. Pinschmidt said companies get a sense of the
material that the FSOC is reviewing during stage two of the designation
process, but said it is “not practical to assume” that the FSOC will have
developed firm views on the risks a company poses during stage two. He
said a rationale for the designation, explaining the risks of a firm, is
provided at the beginning of stage three.
Crapo
asked how many firms have moved onto the third stage but not been designated.
Pinschmidt noted that of the nine firms that have been considered by the FSOC,
five of them advanced to stage two, and four of them have advanced to stage
three, adding that these four firms were all ultimately designated.
De-Designation
Subcommittee
Ranking Member Mark Warner (D-Va.) said there needs to be a de-designation
process and stated that underlying activities of money market funds should be
the guiding factor of potential designations, and not size. He then asked how
the FSOC monitors the transfer of risk in situations like that of GE Capital,
which plans to spin off its financial activities, and if the FSOC and Federal
Reserve (Fed) have tools to address concerns of “de-risking.” Pinschmidt said
the FSOC is “well positioned” to bring together regulators across the markets
to monitor the migration of assets, adding that the FSOC wants to be as transparent
as possible to allow firms to make de-designation decisions.
Sen.
Bob Corker (R-Tenn.) said areas where there can be consensus on improving the
FSOC’s process include: 1) disclosure prior to designation; 2) providing a
pre-designation off-ramp; and 3) providing a post-designation off-ramp. He then
asked if the FSOC would cease considering designation if a company “unloads its
financial arm.” Pinschmidt said the FSOC “will always consider
information or requests,” but noted that, for the designated firms, no one
specific factor was the determinant for designation.
Sen.
Joe Donnelly (D-Ind.) asked if the FSOC has made a list of things that they are
concerned about, saying that a company cannot know what activities to avoid if
they do not know which ones cause concern for the FSOC. Pinschmidt said the
FSOC has not finished its process of understanding whether there are legitimate
risks in certain activities and noted that the Council is currently engaging
with industry to assess liquidity and redemption risk, leverage, operational
risk, and resolution.
Sen.
Dean Heller (R-Nev.) asked if no firm should ever be de-designated. Pinschmidt
said “certainly not” and that there is a clear process in place for
de-designation.
Heller
responded that the de-designation process is not clear. Pinschmidt replied that
the FSOC provides companies with 200-300 pages of documents explaining why the
designation decision was made and that the process allows for dialogue. He then
added that dialogue is a “precursor to action.”
When Crapo asked if there should be an off-ramp, Pinschmidt
said “absolutely,” noting that if a firm pursues an off-ramp strategy “there is
a path” but that it is not a simple endeavor. He added that are “multiple
lanes” for an off-ramp and that a company should be able to chose the lane it
wishes to use.
Crapo
asked at what point there should be an opportunity for an off-ramp. Pinschmidt
said that if there is a specific area that the FSOC is focusing on, then a
company would know about it “long before” the designation documentation is
sent.
Insurance
Warner
asked how insurance companies can pose systemic risk. Pinschmidt said the FSOC
looked at the broader exposure to financial markets of the three insurance
firms they designated, stressing that the designation was due to operations
other than “vanilla insurance operations.”
Financial
Stability Threats
Donnelly
asked what the FSOC sees as emerging threats in the economy. Pinschmidt said
“cybersecurity remains at the top of everybody’s list” and noted the importance
of fostering information sharing between the public and private sectors. He
also said the FSOC is monitoring practices of reaching for yield, risks
contained in central clearinghouses, and emerging market structures across
asset classes.
Mutual
Funds
Donnelly asked where the systemic risk lies in mutual funds. Pinschmidt said
traditional mutual funds are a “different animal” in the way they invest,
noting that they do not have a balance sheet or leverage and that they act as
an agent investing other people’s money. He noted, however, that there has been
“incredible change” in the mutual fund space and that the FSOC has questions on
exchange traded funds (ETFs) and liquidity features of certain products.
Entity
vs. Activity
Sen.
Tim Scott (R-Ga.) said it is highly unlikely that asset managers pose systemic
risk and asked if the FSOC will revisit the designation of insurers to take an
activity-based approach rather than an entity-based approach. Pinschmidt said
the “larger question” of looking at entities and activities is
not an “either/or” question and that “neither approach precludes other
options.”
Sen.
Pat Toomey (R-Pa.) asked if entity based designations are “still on the table”
and if it is still possible for asset managers to be designated as SIFIs.
Pinschmidt clarified that he was “responding generally” in his previous answer.
He stressed that the FSOC has been evaluating risk in the asset management
space for “some time” and that the Council has directed staff to prioritize a
review of products and activities.
When
further pressed by Toomey on whether the FSOC has taken entity-based
designations for asset managers off the table, Pinschmidt said he “cannot
speak” to whether the FSOC “will do down the road” but said it is “firmly
focused” on activities and products, noting that there is recognition that the
asset management industry “is different.”
Toomey said the opacity with which the FSOC operates
is “extremely disturbing” and said there should be an objective and public
description of the activities that the FSOC believes give rise to systemic
risk.
Fed
Regulation
Toomey
asked if the FSOC can assure that no firm will be designated until the Fed
describes how it will regulate the designated activities. Pinschmidt said the
role of the FSOC and the role of the Fed are very different, noting that the
FSOC identifies risks and the Fed decides how to regulate these risks, adding
that there is “some sequencing there.” He said the Fed recognizes that each
industry and firm is different and that it tailors enhanced prudential
standards to the identified risks and firms.
Changes to Process
Warner
asked why the changes in the supplemental procedures should not be codified,
commenting that a future Treasury Secretary could “veer off” the process in
place. Pinschmidt said it is important to “allow the supplemental changes to
work through” and said legislation to extend the designation process from two
to four years would make the FSOC’s analysis unworkable and hamper its ability
to identify and address risks.
Impact
of Designation
Donnelly
said annual returns of mutual funds invested in by everyday Americans will be
reduced if these funds are designated as systemically important because a
portion of the invested money will have to be set aside. Pinschmidt stressed
that the FSOC is not focused on individual mutual funds and that he does not
think “anybody would want to see bank-like standards imposed on companies that
do not have bank characteristics.” He added that studies that hypothesize about
the consequences of a designation are “based on faulty data” and do not
“reflect the record of where the Council is focused.”
For
more information on this hearing, please click here.