WASHINGTON BUREAU — The Financial Stability Oversight Council will soon give detailed details describing the criteria it plans to use to determine which financial firms are systemically significant, a top Obama administration official told Congress today.
Neal Wolin, a deputy Treasury secretary, told the Senate Banking, Housing and Urban Affairs Committee that FSOC will propose additional guidance that will include “specific metrics that will help provide clarity on the FSOC’s evaluation of firms for potential designation.”
The committee held the hearing to mark the 1-year anniversary of implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The new guidance will outline “both the quantitative and qualitative elements of the analytical framework to be used,” Wolin testified at the hearing. “The designation process will employ the judgment of the council’s members based on a comprehensive understanding of a firm’s risks.”
Wolin was president of the property-casualty business at Hartford Financial Services Group Inc., Hartford (NYSE:HIG), from 2007 to 2009.
The Dodd-Frank Act created FSOC — which is often pronounced “F-Sock” — to help financial services regulators decide which organizations need extra oversight because the failure of those organizations could threaten the stability of the financial system.
Insurers are eager to find out just how FSOC will decide which organizations are “systemically important financial institutions” (SIFIs).
Sens. Sherrod Brown, D-Ohio, and Pat Toomey, R-Pa., emphasized the insurance industry’s interest in the topic in a new letter sent to the Treasury Department. Brown and Toomey say in the letter that they “remain concerned about the lack of clarity in the current rule proposed on SIFI designations.”
“Specifically, it is important that the [SIFI] designation criteria involve clear benchmarks, so that firms have some ability to predict whether and when they will be deemed ‘systemically important’ in the eyes of the FSOC, as a [SIFI] designation will significantly affect any firm,” the senators say.
In addition to talking about the upcoming SIFI guidance at the hearing, Wolin talked about “Orderly Liquidation Authority” — authority financial services regulators could use to shut down organizations that they do not normally regulate if problems at those organizations threaten the stability of the financial system. In rare cases — if a systemically important insurer were failing, and its home state regulator failed to resolve the insurer’s problems within 60 days — the Federal Deposit Insurance Corp. would have the authority to take over the insurer and resolve it using the insurer insolvency laws in effect in the insurer’s home state.
Wolin said the FSOC has concluded in a new study that the combination of having the new Orderly Liquidation Authority and new prudential supervision authority granted under the Dodd-Frank Act should give federal officials the ability to wind down a troubled financial firm without the need for requiring secured creditors to accept less than they would otherwise be owed in a conventional liquidation process.
Also at the hearing:
- Wolin said the FSOC soon will release its first annual report, which will describe the monitoring process to be used to prevent the failure of any firm that would constitute a systemic risk to the financial system.
Topics to be covered in the report will include the activities of the FSOC; significant financial market and
regulatory developments, such as changes in insurance and accounting standards; and any potential emerging threats to the financial stability of the United States.
As required by statute, the report also will provide recommendations designed “to enhance the integrity, efficiency, competitiveness, and stability of the United States financial markets; promote market discipline; and maintain investor confidence,” Wolin said.
- Wolin reported that the Treasury Department is making progress at establishing the Office of Financial Research (OFR), a research bureau created by the Dodd-Frank Act that is supposed to provide data on worldwide financial issues. The OFR should have a staff of 60 by fall.
Wolin said the OFR’s first step has been to promote the establishment of a legal entity identifier (LEI) system.
“This public-private initiative, which was launched in November 2010, will create a global standard for the identification of parties to financial transactions,” Wolin said. “Such a standard will improve the abilities of regulators and firms to manage counterparty risk, assure the integrity of business practices, and lower processing costs for financial transactions.”