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Trump's Treasury Secretary Cool on 'Too Big to Fail' Process

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Treasury Secretary Steven Mnuchin took a low-key approach Tuesday to talking about how he might handle regulation of life insurers that could, possibly, be “too big to fail.”

He gave answers that were much shorter than questions when Republicans on the Senate Committee on Banking, Housing and Urban Affairs asked him about the federal process for identifying companies as “systemically important financial institutions” (SIFIs), or as entities other than banks that are so big, and so important, that their failure could knock down the U.S. financial system.

Some observers have suggested the U.S. SIFI process, and related processes in Europe and elsewhere, contributed to MetLife Inc.’s recent decision to spin Brighthouse Financial Inc. off as a separate company, and to pressure on other insurers to break up or realign their own operations.

(Related: FSOC Eyes Insurers’ Commercial Real Estate Loan Holdings)

Mnuchin, who was nominated to his post by President Donald Trump, avoided saying much about the SIFI designation process, but he expressed support for the general idea of giving companies more information about how the process works.

“I do believe there should be better transparency,” Mnuchin said.

Systemically Important Financial Institutions (SIFIs)

Strategies for regulating big insurers came up at a hearing organized by the Senate Banking Committee. The committee held the hearing to review the Financial Stability Oversight Council’s (FSOC’s) latest annual report on financial institutions, and on possible threats to the U.S. financial system. 

Congress created FSOC when it drafted the Dodd-Frank Act, in an effort to give federal policymakers information and regulatory tools that could help them prevent a repeat of the Great Recession.

FSOC set up a system for designating some companies as SIFIs, or entities in need of extra attention because their problems could shake the U.S. financial system. FSOC said it wanted to establish a flexible SIFI designation process, to keep companies from making minor changes to avoid being designated as SIFIs.

The Financial Stability Board, an international regulatory group based in Basel, Switzerland, came up with a separate system for designating companies as “global systemically important financial institutions,” or G-SIFIs.

Life insurers have complained that FSOC’s SIFI designation process has been unfair and hard to understand, and that complying with SIFI-related requirements has been difficult and expensive.

FSOC designated American International Group Inc., MetLife Inc. and Prudential Financial Inc. as SIFIs. AIG and MetLife have already escaped from SIFI status. Observers expect FSOC to free Prudential from SIFI status soon.

Did FSOC Rig Its SIFI Designation Process?

At the Senate Banking hearing, Sen. Tom Cotton, R-Ark., told Mnuchin that the SIFI designation process was clearly unfair. Cotton said that, under former President Barack Obama, two top members of FSOC, the Treasury secretary and the chairman of the Federal Reserve Board, had quietly agreed to let the Financial Stability Board designate MetLife and Prudential as G-SIFIs months before the U.S. FSOC had designated MetLife and Prudential as U.S. SIFIs.

The timing shows that FSOC’s SIFI designation process was biased against MetLife and Prudential, Cotton said.

“Do you believe that this decision was simply a show trial by the FSOC?” Cotton asked Mnuchin.

The United States should be governed by its citizens, not by “unelected experts at Swiss ski resorts,” Cotton said.

More on this topic

Sen. Tim Scott, R-S.C., said later during the hearing that the current U.S. SIFI designation process is like “getting pulled over for speeding in a neighborhood without any speed limit sign.”

Sen. Heidi Heitkamp, D-N.D. (Photo: Senate Banking)

Sen. Heidi Heitkamp, D-N.D. (Photo: Senate Banking)

In response to Cotton’s question about whether the FSOC decision about MetLife and Prudential was a show trial, Mnuchin said, “I wasn’t there, so I can’t comment on that specifically.”

In response to a question from Cotton about whether U.S. FSOC representatives at the Financial Stability Board would ever again let the board designate a U.S. company as a global SIFI before FSOC had ruled on that company’s U.S. FSOC status, Mnuchin said, “I would not expect that to be the case.”

In response to Cotton’s remarks, and Scott’s comments about lack of SIFI designation transparency, Mnuchin said he thinks the designation process should be more transparent.

“It doesn’t mean people don’t get tickets, but we have to post the speed limit,” Mnuchin said.

Multi-Employer Pension Plans

As Treasury secretary, Mnuchin is the head of the federal Pension Benefit Guaranty Corp., the entity that insures defined benefit pension plans.

Two Democrats on the Senate Banking Committee who sometimes vote with Republicans, Sen. Heidi Heitkamp, D-N.D., and Sen. Joe Donnelly, D-Ind., asked Mnuchin to talk about his plans for protecting the participants in multi-employer pension plans against plan failures.

Heitkamp said she’s talked to pension plan participants who are facing 70% benefits cuts.

“That’s unfathomable,” Heitkamp said.

Heitkamp and Donnelly asked Mnuchin whether he could support either a Democratic rescue proposal, the Butch Lewis Act of 2017 bill.

“We need a result,” Heitkamp said. “If that’s not the solution, tell us what is? What’s your plan?”

“It is a very complicated issue,” Mnuchin said.

Mnuchin said that he could talk about the issue in detail at a private meeting after the hearing, but not at the hearing.

The Senate Banking Committee has posted links to information related to the hearing, including a video recording of the hearing, here.

— Read Pension Fears Haunt Trump Treasury Pick Hearing on ThinkAdvisor.

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