U.S. Treasury Department officials agree with U.S. life insurers that the Financial Stability Oversight Council should communicate better, and show more of its work when it’s deciding whether to classify a nonbank financial company as “too big to fail.”
Treasury officials prepared the report in response to an executive memorandum President Donald Trump put out in April
If the Trump administration changes the SIFI rules, that could help agents and brokers, by keeping the biggest issuers in the market, industry groups say. MetLife Inc., put its historic individual life and annuity operations in a separate company, Brighthouse Financial, and made other major changes in its corporate structure, after FSOC designed it as a SIFI.
Supporters of the current system, including Better Markets, have argued that the kinds of changes Treasury is proposing could eventually hurt agents and brokers, by leaving federal regulators without the information and tools they need to prevent, or handle, a future financial crisis.
Children of Dodd-Frank
Members of Congress created FSOC, and the SIFI designation program, in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The drafters were responding to the Great Recession that started in 2007. In 2007, many homeowners began having trouble with making their mortgage payments. Mortgage defaults hurt the performance of mortgage-backed securities. The problems in the mortgage-backed securities hurt the performance of the credit default swaps that were supposed to protect the mortgage-backed securities holders against default risk.
Economists had taught students for years that homeowners would do everything possible to keep making mortgage payments. The increase in the default rate in 2007 shocked the lenders and the holders of the mortgage-backed securities. Managers at the credit default swap issuers, who once thought they were writing instruments comparable to alien abduction insurance, suddenly found themselves facing demands for cash collateral.
Some of the companies that wrote the credit default swaps were insurance companies and other companies outside the banking and securities sectors.
Dodd-Frank drafters tried to protect the U.S. economy from a repeat of the Great Recession, and problems erupting in markets outside of federal regulators’ field of vision, by creating FSOC.
Federal regulators were already hearing about bank industry problems from federal bank regulators, and about securities problems from the U.S. Securities and Exchange Commission.
FSOC is supposed to supplement the reports of the bank regulators and the SEC, by scanning the U.S. economy as a whole, for trends or entities that could wreck the economic system. FSOC is also supposed to designate any entities critical to economic stability as SIFIs, and to give federal regulators tools they can use to address potential systemic risk problems.
Supporters of FSOC and the current SIFI designation system say the federal government needs something like FSOC program to keep track of any problems building up outside the banking and securities sectors.