Top Finance Regulators Brace for Financial Services Showdown

House Financial Services Committee Chairman Jeb Hensarling (R-Texas) will get a high-profile opportunity on Tuesday to press the Obama administration on how it determines whether financial institutions are designated as “systemically important.”

An all-star team of Obama administration officials will find themselves in the crosshairs of House Financial Services Committee Republicans, as the panel examines the operations of the Financial Stability Oversight Council. All but two of the 10 members of FSOC will attend. The council is made up of the chairmen of administration’s 10 major financial regulators.

Not appearing are Treasury Secretary Jack Lew, who was excused because of a previous testimony on FSOC’s operations in June, and Federal Reserve Chair Janet Yellen, who declined the committee’s invitation to testify. The Fed did not respond to requests for comment about Yellen’s reason for declining.

A senior Republican aide told Morning Consult that members would keep the focus on the council’s determinations of financial stability, despite the myriad individual issues lawmakers might want to raise with various witnesses. The witness panel includes Securities and Exchange Commissioner Chair Mary Jo White and Consumer Financial Protection Bureau Director Richard Cordray, among others.

The aide said members would ask how FSOC determines whether a financial institution, bank or non-bank, is deemed systemically important and how it weighs systemic risk in financial markets.

Rarely do so many top administration officials appear before a committee together. Their appearance emphasizes the importance that Hensarling places on overseeing FSOC’s operations. He has consistently derided the council’s decision-making processes and their effects on financial markets and institutions. Being designated as systemically important, for example, can hamper a financial institution’s market activity.

“It fits squarely with what he’s made his priority,” said Brandon Barford, a partner at Beacon Policy Advisors who previously worked on the Senate Banking Committee for Sen. Richard Shelby (R-Ala.), in an interview Monday. As for the star-studded lineup, Barford added, “it’s quite extraordinary. Rarely does this happen outside of a crisis situation.”

Although Hensarling will want to keep the focus on definitions of financial stability, the opportunity to ask questions of so many top regulators at once may be too good for some lawmakers to pass up. “The fireworks will come when members get a chance to ask their one or two questions, which could be on anything from the Department of Labor fiduciary rule to payday lending to auto lending,” Barford added.

FSOC’s operations have been a primary legislative target of Hensarling’s chairmanship. When Lew delivered FSOC’s annual report to the committee in June, Hensarling sharply criticized what he called the council’s lack of transparency and its failure to implicate government regulators for their role in creating systemic risk.

“FSOC simply refuses to look in the mirror. In its report, it conspicuously omits any references to specific government policies or agencies as helping cause the systemic risks it identifies,” Hensarling said at that hearing. “FSOC typifies not only the shadow regulatory system but also the unfair Washington system that Americans have come to loathe: powerful government administrators, secretive government meetings, arbitrary rules, and unchecked power to punish or reward.”

Last month, Hensarling shepherded a series of bills through the committee aimed at reining in the panel’s power. He promised that they were just the “first tranche” of FSOC-related legislation that the committee would consider.

The bills, which include measures to change the criteria for determining systemic importance and to allow non-bank firms the chance to appeal their designation, were deliberately not ideological firebombs. Hensarling is betting that he can gain some bipartisan ground on lifting some of the regulatory burdens as pressure grows to give financial firms some relief.

Multiple bills in the committee have won Democratic support, some of them over the opposition of the Obama administration and senior Democrats like Financial Services Committee Ranking Member Maxine Waters (D-Calif.).

The administration officials will likely be reluctant to directly answer questions about how FSOC determines systemic risk. They do not want to get stuck on record discussing the precise details of policy determinations that have a direct impact on how large firms conduct themselves.

“The regulators are going to be loath to list out a guidebook on how to do that, but they will also encourage firms to simplify and de-risk,” Barford said.

 

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