WASHINGTON -- Already facing criticism for its new plans to scrutinize the mutual fund industry, the Financial Stability Oversight Council was characterized as an enigmatic interagency body that has not provided enough rationale for designating certain financial firms as a threat to the economy.
During a marathon four-hour hearing by the Republican leadership of the House Financial Services Committee on Dec. 8, eight of the 10 voting members of the council - minus its leader, Treasury Secretary Jack Lew, and Federal Reserve Chairwoman Janet Yellen - found themselves on the defensive that they were keeping lawmakers and the public in the dark about their activities, which now includes scrutinizing mutual funds for systemic risks.
When regulators tried to emphasize that they were dealing with confidential supervisory information, lawmakers dismissed that idea.
"Do you know that this body gets intelligence briefings from the FBI in regards to ISIS and terrorist attacks?" said Rep. Sean Duffy, R-Wis. "I would argue that American lives are in danger by these radical extremists. So we can get FBI briefings, but you won't give us briefings on the analysis that has gone into designation of certain companies in America?"
MORE HARM THAN GOOD
The exchange illustrated the continued outrage by Republican leaders at the FSOC, which they have repeatedly argued does not provide sufficient justifications for its actions. While the hearing occasionally dipped into areas unrelated to the interagency council, GOP lawmakers argued that the council's process is too opaque, its designation of insurance companies as systemically risky was unnecessary, and that it ultimately does more harm than good.
Committee Chairman Jeb Hensarling, R-Texas, said the FSOC is "one of the most powerful federal entities to ever exist and, unfortunately, also one of the least transparent and least accountable as well," adding it has "earned bipartisan condemnation for its lack of transparency."
Rep. Scott Garrett, R-N.J., complained that the FSOC, in its September meeting, apparently included "20 or so invited guests from various agencies" but fellow commissioners from agencies represented on the FSOC were not among them.
Garrett asked FDIC Chairman Martin Gruenberg if he thought the two board directors of his agency who are not already members of the FSOC are untrustworthy - insinuating that the only other reason to exclude them from meetings is that the council has something to hide.
"I'm taking the perception here that either you don't trust your people or that you're doing something in secret," Garrett said. "So which [is it], Mr. Gruenberg? Do you not trust your people or you're trying to do something in secret?"
Gruenberg replied that he shares all information with other FDIC board members, arguing that the issue of not having them be present was really "a matter of functionality" in how many regulators attended the meeting.
Gruenberg similarly bore the brunt of Duffy's questions about why lawmakers could not receive more information about the designations of American International Group, GE Capital and Prudential as systemically important financial institutions.
"It seems to me that the line here is when you're dealing with confidential supervisory information, and the three [nonbank SIFIs] you referenced are open institutions," Gruenberg replied. "You have to strike a balance there."
EXCESSIVE REGULATORY BURDENS
Lawmakers in particular zeroed in on why insurance companies should have been designated as SIFIs when the independent insurance expert on the council, Roy Woodall, dissented in the decisions to designate Prudential as a SIFI in 2013 and MetLife in 2014.
Hensarling opened his questioning by asking whether anyone on the panel had expertise in insurance or the regulation of insurance firms - to which only Woodall responded in the affirmative. Rep. Blaine Luetkemeyer, R-Mo., said he was concerned about the lack of dedicated staff at the FSOC member agencies who have such expertise or familiarity. That may have led to "Fed-driven decisions on some of these designations," he said.
"So, how can with we make an educated analysis whenever you're making designations with regards to non-bank designations, which involve insurance companies? How do you make that determination, then?" Luetkemeyer asked National Credit Union Administration Chair Debbie Matz.
Lawmakers asked Matz several questions about her agency's role in the designation process, implicitly questioning what a credit union agency knows about large insurance firms.
"It is not the insurance part of the business that results in a designation," Matz replied. "It's in the financial services part of the business."
Several members asked the council members whether it had any intention of examining its own actions or the actions of its agencies as being a cause of systemic risk. Rep. Andy Barr, R-Ky., pointed out that the FSOC's own annual report and recent reports by the Office of Financial Research and others have identified potential risks associated with a lack of liquidity that could be due to excessive regulatory burdens, and yet the FSOC has not addressed that risk.
"This potential lack of liquidity that is resulting from regulation could mean that financial markets have less capacity to deal with shocks and would more likely seize up in a panic, just as they did in the 2008 financial crisis," Barr said.