House GOP Exposes “Too Big To Fail” Designations As “Arbitrary and Inconsistent”
The House Financial Services Committee has released a report exposing the Financial Stability Oversight Council’s (FSOC) process for designating non-bank firms as systemically important financial institutions (SIFI) as “arbitrary and inconsistent.” The report comes out as the D.C. Circuit Court of Appeals is set to rule on the Obama Administration’s appeal to MetLife’s victory overturning it’s SIFI designation.
The Dodd-Frank Act gave FSOC the authority to designate non-bank institutions as too big to fail, subjecting them to a whole host of additional bank regulations from the Federal Reserve. Classifying companies like AIG, Prudential, and MetLife as systemically important does more to signal future taxpayers bailouts than ensure financial stability in light of a crisis.
The report examines FSOC documents and concludes the process determining which firm should be subject to higher regulations has no substantial basis. The Council does not treat companies the same in evaluating material financial distress, and provides no explanation for the subjective process and lack of adherence to its own rules.
Metlife won their initial case, now in the appeals process, with the same arguments contained in the House report. The district court ruled the designation process “fatally flawed.” This isn’t the first case of a company fighting, and winning, against FSOC and this failed regulatory process.
The mere existence of a systemically important designation increases the odds of financial distress by encouraging large financial institutions to take risks without bearing the cost. This designation process lacks accountability and gives the government the power to put taxpayers on the hook for future bailouts. This is exactly why the proposal to repeal Dodd-Frank, the Financial CHOICE Act, eliminates FSOC and empowers financial institutions to escape regulation if they chose to bear their own risks.