The Financial Stability Oversight Council (FSOC) expects to vote on proposed designations of an initial set of nonbank financial companies in the near term, according to Treasury Secretary Jacob Lew in prepared testimony today before the Senate Banking Committee.
These companies, which include AIG, Prudential Insurance among insurers, if designated, would be subject to supervision by the Federal Reserve and enhanced prudential standards.
In questioning, Senate Banking Committee Chairman Tim Johnson, D-S.D., pointedly asked twice when the nonbank designations would be made.
Lew did not give a timetable for nonbank SIFIs but did say that it is a priority to getting the Dodd Frank work done expeditiously, and appeared to suggest several times he was making sure Dodd-Frank work started moving ahead at a faster pace.
"My role is to make sure we don’t measure our progress in months and years but we measure in weeks and months,” Lew said.
He said he has made it clear that there is an enormous priority that “we complete the rules so everyone knows what the policy is,” and so that he public can be protected.
We must implement Dodd-Frank, and we must do it quickly, but we need to continue to look at the whole system, Lew said in testimony. Lew also made statements that appear to show flexibility on crafting rules that are more tailored to the institutions over a “one size fits all” regime.
“I think there will be progress this year,” Lew said. He noted there is an FSOC meeting the first week in June and while he has had three FSOC meetings so far in his three months as Treasury secretary, he has met on the issue in between these formal meetings.
Lew, who heads FSOC, said he was trying to get the nonbank SIFI matter up for a decision “as quickly as possible.”
“I have actually stepped on the accelerator,” with regard to Dodd-Frank implementation, Lew said later on in the hearing. He said this is important because finalizing Dodd-Frank work is a matter of “public trust.”
Lew added, though, that he does not have the ability to direct action with regard to other regulators on FSOC but said it was more a matter of moral situational influence he can have.
If an insurance SIFI designation or designations are made, it might not be public immediately, as the companies have a hearing or consultation period with FSOC. The companies can announce at any time the qualified FSOC determinations, but Treasury has indicated it will not announce it until the process is complete, which includes feedback from any companies.
There has been “substantial progress but more progress to be made,” Lew said in open remarks on too-big-to-fail and on FSOC’s progress.
Sen. Jack Reed, D-R.I., asked about Section 171 of the Dodd-Frank Act — the Collins amendment — which would place by default Federal Reserve Board-supervised insurers under Basel 3 minimum capital standard requirements, which concerns the industry, some government officials and various Congressmen.
Lew responded that first, FSOC needs to make a determination whether the companies’ failures would be a threat to the financial stability of the country.
However, he acknowledged in questioning earlier that different agencies are figuring out how to set levels in various areas,” possibly referring to managing the prudential standards and Basel 3 capital standards. Lew also later noted he had heard the concerns about the rules being fitting to all companies. Lew said it was an issue the Fed “will look at and we will look at if the determination is made.”
His statement reflects only nonbank SIFIs (reliant on SIFI determinations being made) and not the two dozen or so insurers with savings and loans holding companies, such as State Farm and The Principal (the latter of which is in the process of dethrifting).
Lew also appeared to show flexibility on Basel 3, which he called “a floor and not a ceiling,” and discussed aspiration goals globally that pull up standards everywhere. The possible flexibility he showed on the Basel 3 blanket application to all institutions under the Fed's umbrella were directed to senators' concerns on community banks being subject to Basel 3 capital rules.
In general, Lew noted that for institutions, the capital level needs to form a thick enough layer to make sure we never get to the point of too-big-to-fail. Lew spoke in reference to crafting final rules on adequate capital standards in general.
There needs to be sufficient capital for the point of liquidation [if a company fails], and just how it gets there and how it works is something FSOC is still working on, Lew said, in response to a question on capital held at the holding company level.
Insurers do not keep their capital at the holding company level, but address risk-based capital at the subsidiary level. However, Lew did not get into any detail about insurance companies or operations during this panel session.