The Government Accountability Office’s released a report yesterday backing a point the financial services industry has been making for years: the Financial Stability Oversight Council needs to open up about the process it uses to determine whether to label insurance companies, finance companies, asset managers, and other non-bank financial companies as “systemically important” and to subject them to bank-centric regulations established by the Federal Reserve.
The power to designate a company as a potential systemic risk to the economy is a serious responsibility – and the FSOC’s exercise of that power should be transparent, based on strong empirical data, and involve substantive engagement with the companies under consideration. FSOC claims the potential failure of these companies would cause another ripple in the U.S. economy. However, no one can dispute or confirm this to be true because FSOC won’t fully explain the criteria being used to reach that decision.
The GAO issued a similar report in September highlighting many of these same problems. Both of these reports echo a petition sent by a group of key financial services industry representatives, including FSR, in August. That petition requested that FSOC officials improve the scope and quality of data and information they use, improve the notice FSOC provides to a nonbank financial company under consideration for a designation, and ensure that the nonbank financial company and its primary financial regulators are able to provide information to FSOC that is relevant to the question of whether the company should be regulated by the Fed.
The GAO noted in September that FSOC still isn’t making even the smallest of changes, such as taking detailed minutes at meetings. And it’s clear regulatory officials still aren’t serious about improving transparency.
Despite these concerns, FSOC is still moving full steam ahead to expand the reach of the Fed. Like a broken record, the newest GAO report again concludes that FSOC’s process is indeed in serious need of both sunlight and repair.
For example, FSOC doesn’t keep records of which staff member conducts research on a company’s potential risk to the economy, so there is no way to later verify the information trail.
FSOC’s transparency policy says it’s committed to operating in a transparent manner, but public documents often lack key disclosure details, including rationales for its determination decisions.
GAO report noted that FSOC’s decision to not release clear reasons for designating firms “may undermine the public’s and the market’s confidence in the determination process.” Notably, providing more transparency would not require that FSOC disclose “confidential and sensitive information” in the GAO’s view.
There is little to no information about how FSOC staff are calculating or weighting the criteria FSOC uses to evaluate companies. But the leading criterion seems to be the company’s size. Asset size can’t confirm if a company poses a risk to the overall economy. Companies should be judged on what they do and how they are connected to the economy – details that any economist will tell you really count.
Dodd-Frank grants FSOC authority to designate companies for heightened prudential supervision. But that law also requires FSOC to develop plans for the evaluation process of the company and clear criteria for how a company qualifies.
The GAO report also says FSOC has failed to record key processing dates, has failed to track the duration of evaluation stages and hasn’t monitored how its staff is collecting their data or which agency’s staff is contributing to the process.
This is problematic to say the least.
We applaud the work of the GAO on this report. Their efforts, as well as the efforts of Reps. Dennis Ross and John Delaney on their bill that would require FSOC to give firms early notice that they could be designated as systematically important, among other measures to lift some of the secrecy surrounding FSOC, are critical to shedding light on this situation.
How many more official reports will it take before regulators show they are listening?