WASHINGTON — Nearly nine months after the enactment of Dodd-Frank, lawmakers said Thursday they were troubled by the lack of details provided by regulators on how they will designate institutions as systemically important.
Members of both political parties criticized representatives of the Financial Stability Oversight Council, suggesting they had made little progress in undertaking one of the most important aspects of the regulatory reform law.
"It doesn't appear you're being very transparent," said Rep. Randy Neugebauer, the chairman of the House Financial Services oversight subcommittee, saying agency officials just parrot the law's language, which left the issue mostly up to regulators to determine. "What we're hearing from people trying to respond back … they got the same response if you reprinted Dodd-Frank. What we're looking for is a little bit more transparency."
Lawmakers raised concerns with how many institutions might be designated as systemically important — and therefore subject to additional capital and liquidity requirements — and noted several vacancies on the FSOC itself, including a Senate-confirmed member with insurance expertise.
The council has released two proposals laying out a process to designate nonbank financial companies as systemically important, but neither provided many details on what regulators were planning. Instead, regulators have repeated references in Dodd-Frank to examine a firm's vulnerabilities, its interconnectedness with financial firms, size and other factors.
While banks with more than $50 billion of assets are automatically considered systemically important, lawmakers said they are no closer to understanding what nonbanks, including insurance companies, regulators may place in that category. Such companies should have a chance to comment before regulators take action, they said.
"I don't like that situation," said Rep. Michael Capuano, the lead Democrat on the subcommittee. "We are in a whole new world particularly when it comes to insurance [companies] and nonbanks. We have never regulated the people we are about to regulate. It's only fair to give them an opportunity to respond."
Jeffrey Goldstein, Treasury undersecretary for domestic finance, said the department has received about 50 comment letters from its first advanced notice of proposed rulemaking, and 30 more from its follow-up issued in December.
"I can assure you the comments we have received … we are taking very seriously and will do our best to be responsive," Goldstein said.
Still, Neugebauer, R-Texas, said it was hard for commenters to say anything substantive because of the lack of details in regulators' plans.
"It basically restated what was in Dodd-Frank," he said. "I think it's absurd that we are going to issue a rule as important as this and we do not have specifics on what criteria is going to be used until after you have already decided that and you are deciding that without everybody on the table."
Neugebauer told Goldstein to tell Treasury Secretary Tim Geithner that "a review of this process is in order."
That sentiment was shared by several other lawmakers, including Rep. Bill Posey, R-Fla.
"It should be clear what standards are going to be used in making that determination," said Posey, who said it was imperative to get out to the public additional information about the proposal's metrics, rather than continue to keep that information vague.
Neugebauer said systemic designation was only one of many examples that industry was left in the dark on the approach regulators intend to pursue.
"We're hearing these rules are being put out with very little information, very difficult to respond to or comment to, because they're really not sure what they are commenting on," he said.
Even when pressed for answers, regulators offered no new information on how firms would be designated as systemically important.
"The work on that is still very much a work in progress," Goldstein said. "I can't answer specifically what it will include, what it will not include."
But lawmakers were also worried about vacancies on the interagency council — including an insurance expert, a director for the Office of Financial Research and a head of the Consumer Financial Protection Bureau — and what impact that might have.
Still, not every lawmaker was concerned about the process. Rep. Barney Frank, the top Democrat on the House Financial Services Committee, asked regulatory officials if they had been lobbied by firms to be kept out of the process. Across the board, regulators said they had been approached, which he interpreted as indication of the statute's effectiveness.
But Frank said institutions were making too big a deal of such a designation.
"Being designated is not a great boon, I don't think it will be a great negative either," Frank said. "It's very clear from the evidence that what we tried to do here is perceived by the institutions themselves as having worked the way we hoped it would."
But others worried about how many institutions would fall under this umbrella — and the potential for moral hazard.
"The moral hazard implications of these designations and power can't be overstated," said Rep. Spencer Bachus, R-Ala.
