A member of Congress is demanding that the New York Federal Reserve Bank share with him any information provided by the Bank to members of the Financial Stability Oversight Council (FSOC) regarding the process of designating non-banks as systemically important financial institutions (SIFI). In his letter, Rep. Scott Garrett, R-N.J., noted that while the NY Fed “is not formally included” as a member of the FSOC, it acts as a resource in providing financial data to FSOC members regarding financial industries and companies the FSOC is eyeing as potential threats to the financial system and potential SIFI designees.
The letter was written to William C. Dudley, president of the Federal Reserve Bank of New York. Rep. Scott Garrett wrote the letter as chairman of the Capital Markets Subcommittee of the House Financial Services Committee (FSC).
A spokesman for the NY Fed acknowledged that the agency had received the letter, but declined further comment.
Garrett is acting on behalf of insurance companies, mutual funds and money managers who have been informed by the FSOC that they are under scrutiny for possible designation as SIFIs. They are also voicing deep concern about how such a designation would have a substantial negative impact on their business.
Citing the recent annual report of the FSOC, securities analysts also note that the FSOC is taking a hard look at mortgage servicers and mortgage REITs for possible designation as SIFIs.
The bill’s immediate impact would likely be on the designation of MetLife as a systemically significant financial institution or SIFI. MetLife is in Stage III, or the final stage, of the SIFI designation process. MetLife has been lobbying against designation as a SIFI for more than a year, and the FSOC has responded by slowing its decision-making process on MetLife to ensure it has all its ducks in a row before making a decision.
The FSOC already has designated three non-banks — American International Group, General Electric Capital Corp. and Prudential Financial, Inc. — as SIFIs.
In his letter, Garrett asked Dudley that the NY Fed provide him with “any document, research report, chart or other material that you or Fed NY staff have presented to members or staff of the FSOC, or any of its member agencies, or the Financial Stability Board, or any of its members, or other personnel, in relation to the potential designation of firms as SIFIs.” Garrett’s request is consistent with legislation reported out by the FSC June 20 that would effectively shut down the operations of the FSOC for at least the next year.
One bill, H.R. 4881, would bar the FSOC from designating any financial institution as systemically significant for a year.
The other bill, H.R. 4387, would allow all members of the commissions and boards represented on the FSOC — such as the Securities and Exchange Commission, the Federal Reserve, the Commodity Futures Trading Commission, and the National Credit Union Administration — to attend and participate in the FSOC’s meetings. The bill also requires that before the principal of a Commission or Board represented on the FSOC votes as an FSOC member on an issue before the FSOC, the Commission or Board must vote on the issue, and the principal must follow that vote at the FSOC meeting. The bill also permits House FSC members to attend all FSOC meetings, whether or not the meeting is open to the public.
In introducing the bill, Garrett said that “the council meets in secret, refuses to disclose substantive transcripts, and blocks any requests by other regulators or Members of Congress for a more open and transparent process.” In April, Garrett was denied access to an FSOC meeting.
He noted the “tremendous changes” that the FSOC is considering in the way capital and credit are allocated and said “it is imperative these changes are not carried out in secret or behind closed doors.”
The bill was reported out by the House FSC along party lines. During debate on the measure, Rep. Maxine Waters, D-Calif., ranking minority member of the House FSC, said: “we are not dealing with a good faith effort to address many of the transparency concerns a bipartisan group of members have raised. Rather, this is an effort by Republicans to make the FSOC decision-making impossibly difficult.”
In his letter today, Garrett acknowledged that “it is understandable” that the Federal Reserve Board may rely on information from individual Fed banks in assessing companies located in their districts or overseen by those banks. “However, considering the lack of disclosure and general air of secrecy surrounding FSOC designations, and the tremendous stakes involved, it is imperative that we understand the role your bank has played in these decisions,” Garrett added.
The spotlight turned on money managers last September when an FSOC report prepared by the Treasury Department’s Office of Financial Research identified activities of 20 of the largest U.S. money managers as possible sources of risk.
And, at the annual meeting of the Investment Company Institute May 21, Paul Schott Stevens, president and CEO, said that designating mutual funds as SIFIs “would impair the single best tool available to average Americans for retirement saving and individual investment — as well as a key source of financing in our economy.”
Treasury Secretary Jacob Lew heads the FSOC, which was created by the Dodd-Frank financial services reform law.