Treasury Is Said to Seek Wall Street Input on Overhauling FSOC

The council could tag activities, rather than companies

Steven Mnuchin (Photo: Treasury) Steven Mnuchin (Photo: Treasury)

(Bloomberg) — The Trump administration is letting the financial industry make its case that a super regulator set up to prevent a repeat of the 2008 crisis should be reined in.

At a closed-door meeting in Washington Thursday, lobbying groups for banks, securities firms and banks argued to Treasury Department officials that the Financial Stability Oversight Council should revamp its approach, according to people with direct knowledge of the topics discussed. Industry participants said the council should stop tagging companies as “systemically important,” a label that subjects them to greater scrutiny. The groups also want it to be easier for firms that have been called out as risky to escape the additional oversight.

(Related: Treasury Pushes Congress to Rein In Dodd-Frank, Consolidate Regulators)

The Treasury officials were receptive to the industry’s ideas, said the people who asked not to be named because the meeting was private.

FSOC, a panel of regulators that includes the Treasury and the Federal Reserve, has authority to declare nonbank financial firms systemically important, which subjects them to tough Fed monitoring and stress tests designed to assess whether firms can survive economic meltdowns. Since being created by the 2010 Dodd-Frank Act, the council has faced constant criticisms from financial firms and Republican lawmakers that it’s opaque and that it gives government too much power over industry.

While big banks such as JPMorgan Chase & Co. and Goldman Sachs Group Inc. automatically received the systemic-risk label, just two companies remain under Fed oversight that FSOC designated: insurers American International Group Inc. and Prudential Financial Inc. The people familiar with this week’s meeting said industry representatives and Treasury officials discussed how FSOC could give up its authority to name companies, and instead flag certain business activities as risky.

‘Thorough Review’

The Treasury held Thursday’s meeting because President Donald Trump directed Treasury Secretary Steven Mnuchin in April to initiate a “thorough review” of FSOC’s designation methods, with a particular focus on giving firms a better escape route and making its approach more transparent. The Treasury is expected to issue a report on FSOC in September.

The Treasury also scheduled a meeting Friday to hear from academics and policy experts from think tanks, the people said.

“Treasury has been consistently committed to engaging external stakeholders, including policymakers, academics, consumer groups, think thanks, and industry leaders, on ways to improve financial regulation,” the Treasury said in an emailed statement.

Though FSOC’s power to label systemically risky firms is dreaded by big financial companies, its track record for actually doing it has been limited. The panel flagged four companies in its early days, but hasn’t made a move to designate others for years. Of the original four, General Electric Corp.’s financial arm, GE Capital, got out by shedding much of its business, and MetLife Inc. escaped designation through a court ruling that is under appeal.

Because FSOC was established by Dodd-Frank, Trump-appointed regulators can’t shut it down without action by Congress. Still, Mnuchin has great sway in stopping systemic-risk designations — or removing such labels.

—With assistance from Ben Bain and Robert Schmidt.

--- Read Insurers Get 180 Days of SIFI Designation Relief on ThinkAdvisor.

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