Warren, Other Dems Take Surprising Stand on FSOC Delistings

WASHINGTON — Senate Democrats have now jumped into the fight over the Financial Stability Oversight Council's process for designating nonbank giants for tougher federal oversight, arguing regulators should give eligible institutions a clearer path on how to "de-designate."

Several key Democrats on the Banking Committee pressed Treasury Secretary Jacob Lew Wednesday about the FSOC's procedures, joining others who have questioned the designations.

By labeling a firm as a "systemically important financial institution," the council can subject it to bank-style supervision from the Federal Reserve Board. But the council has been criticized for not being transparent enough and for giving firms considered for a designation insufficient opportunity to participate in the process.

The council does technically have the ability to delist a SIFI after its designation, but Sen. Elizabeth Warren, D-Mass., and others raised concerns with Lew about whether companies can indeed satisfy the council with enough changes in business structure to eventually lose the label.

"Is FSOC willing to reverse the designation of a company if it finds that the company no longer poses systemic risk?" Warren said. (As Treasury secretary, Lew chairs the FSOC.)

Warren argued that giving institutions the ability to de-designate might actually be better for the financial system than being subject to ongoing regulatory scrutiny "because it would allow businesses to find the most efficient way of reducing the risks that they pose to the economy."

Lew affirmed that FSOC does allow de-designations. He noted that the council always reviews the status of a SIFI annually for that reason. But he cautioned that use of the annual checkup is still in its early stages — the council only started issuing designations in September 2013 and only four nonbanks have the label — and warned that the delisting process would not be easy given the complexity of the institutions.

"It's not the case that it's just one marginal activity that's the basis for designation — it's the entire complex business structure. So it would really mean making — in each of the designations we've made — some pretty dramatic decisions about business structure," he said.

The discussion on FSOC delistings came as the committee prepares to move forward with regulatory reform legislation next month, which could potentially include changes to the council. Sen. Richard Shelby, R-Ala., chairman of the committee, will need to find areas of bipartisan support if the bill is to gain enough momentum to advance to the Senate floor.

Other Democrats also stressed that the Dodd-Frank Act provisions creating the FSOC process were not meant to make designations irreversible. They joined Republicans on the committee with similar concerns.

"For those of us who were very involved in Dodd-Frank, there was no intent to create a 'Hotel California' provision. There was always this ability … to de-designate," said Sen. Mark Warner, D-Va., who added that he feared there was a "lack of clarity and information-sharing" for companies who have been designated so far.

Lew said the council has heard the criticism of its process loud and clear, pointing to changes instituted last month meant to make the designation procedure more transparent and to provide for more robust reviews.

Lawmakers, however, appeared to remain skeptical that the new guidelines will be sufficient.

"My hope is that we'll have some evidence of some firm with this new, collaborative process being able to make the choice to exit out early," Warner said.

Sen. Robert Menendez, D-N.J., pressed Lew on whether nonbank companies, which made it to the later rounds of consideration before a final designation, were given an opportunity to change their business activities to avoid the SIFI label.

"When FSOC is considering a company for possible designation, to what extent does the updated process allow for a discussion of steps the company can take if it wants to avoid a designation, for example by reducing the size or modifying activities?" Menendez said.

Lawmakers addressed other issues about the FSOC's structure. Both Warner and Sen. Bob Corker, R-Tenn., suggested the council should have an independent chair rather than be headed by a political appointee.

Sen. Sherrod Brown, D-Ohio, the panel's lead Democrat, said he largely supported the work of the council, but he wished regulators would move faster on the designation process.

"In my view, the FSOC is working. If anything, it is working too slowly," he said in his opening statement. "Since FSOC's creation five years ago it has only designated four non-banks as systemically important — by my math, that's less than one a year."