On June 29, the Financial Stability Oversight Counsel (FSOC) announced that it rescinded its July 2013 “systemically important” designation of a Connecticut-based financial company. FSOC’s July 2013 designation subjected the company to supervision by the Federal Reserve and enhanced prudential standards. According to FSOC, the company posed a threat to U.S. financial stability due to its standing as one of the largest – ranked by assets – financial services companies in the U.S. At the time of its designation, the company also acted as a significant source of credit to the U.S. economy by providing financing to more than 243,000 commercial customers, 201,000 small businesses through retail programs, and 57 million consumers in the U.S. On June 28, FSOC unanimously voted to rescind its designation, stating that the company had “fundamentally changed its business” by, among other things: (i) decreasing its total assets by more than 50 percent; (ii) moving away from short-term funding; (iii) reducing connections with large financial institutions; (iv) no longer owning any U.S. depository institutions; and (v) no longer providing financing to U.S. consumers or small businesses in the U.S. FSOC also noted that, “[t]hrough a series of divestitures, a transformation of its funding model, and a corporate reorganization, the company has become a much less significant participant in financial markets and the economy.” Treasury Secretary Lew commented that the FSOC’s decision demonstrates a two-way designation process: “The Council follows the facts: When it identifies a company that could threaten financial stability, it acts; when those risks change, the Council also acts.”
The House of Representatives delayed discussion of HR 1309, the Systemic Risk Designation Improvement Act, in an effort to give the bill’s sponsor Blaine Luetkemeyer (R-MO) additional time to propose a method to fund the estimated $115 million cost of implementing the changes in regulatory oversight. The increased oversight costs stem, in part, from provisions in the bill that would require closer involvement by the Financial Stability Oversight Council (FSOC) in determining whether a bank holding company is a Systemically Important Financial Institution (SIFI), and thus subject to enhanced supervision and macro-prudential standards by the Federal Reserve. Under the current law, originating from Title I of the Dodd-Frank Act, the FSOC looks only to whether the bank holding company has $50 billion in assets. Whereas under HR 1309, the FSOC would also factor whether a bank was subject to material financial distress, as well as the nature, scope, size, scale, concentration, interconnectedness or mix of the bank’s activities in making the SIFI designation.
On June 21, the Financial Stability Oversight Council (FSOC) released its 2016 annual report. The report reviews financial market and regulatory developments, identifies emerging risks, and offers recommendations to enhance the U.S. financial markets, promote market discipline, and maintain investor confidence. Among other things, the report focuses on threats and vulnerabilities related to cybersecuritry, marketplace lending, and distributed ledger systems/blockchain technology. Addressing the need for heightened cybersecurity, the report advises financial institutions to work together with government agencies to better understand risks associated with destructive malware attacks and to “improve cybersecurity, engage in information sharing efforts, and prepare to respond to, and recover from, a major incident.” Regarding marketplace lending, the report stresses that, as the industry continues to grow, “financial regulators will need to be attentive to signs of erosion in lending standards.” Finally, according to the report, distributed ledger systems pose operational vulnerabilities that “may not become apparent until they are deployed at scale,” and cautions that a “considerable degree of coordination among regulators may be required to effectively identify and address risks associated with distributed ledger systems.”
Recently, the Government Accountability Office (GAO) released a report on the effectiveness of the U.S. financial system’s existing regulatory structure. In examining the financial regulatory system, the GAO conducted a performance audit from April 2014 to February 2016, dividing the regulatory system into the following sectors based on the various agencies’ missions: (i) safety and soundness oversight of depository institutions; (ii) consumer protection oversight; (iii) securities and derivatives markets oversight; (iv) insurance oversight; and (v) systemic risk oversight. The GAO found that “[f]ragmentation and overlap have created inefficiencies in regulatory processes, inconsistencies in how regulators oversee similar types of institutions, and differences in the levels of protection afforded to consumers.” Based on its audit, the GAO concluded that the regulatory structure as it stands does not always guarantee (i) efficient and effective oversight; (ii) consistent financial oversight; and (iii) consistent consumer protections. The report further identified problems with the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR), which are regulatory groups created out of the Dodd-Frank Act to address gaps in systemic risk oversight. Specific problems highlighted in the GAO’s findings include: (i) potential missed opportunities and duplicative analyses as a result of the Federal Reserve’s and the OFR’s similar systemic risk monitoring goals but lack of key collaboration; (ii) a lack of reliance by FSOC on the Federal Reserve’s and the OFR’s systemic risk monitoring efforts; and (iii) limitations on FSOC’s authority to address broader systemic risks that are not specific to a particular entity. The GAO emphasized that, “[w]ithout congressional action it is unlikely that remaining fragmentation and overlap in the U.S. financial regulatory system can be reduced or that more effective and efficient oversight of financial institutions can be achieved.”
On November 5, the Board finalized Reg. XX thereby implementing Section 622 of the Dodd-Frank. The final rule, which was proposed in May, prohibits a financial company from combining with another company if the resulting company’s liabilities exceed 10 percent of the aggregate consolidated liabilities of all financial companies. The final rule also adds an exemption to clarify that a financial company may continue to engage in securitization activities if it has reached the limit and establishes reporting requirements for financial companies that do not otherwise report consolidated information to the Board or other Federal banking agency. Financial companies subject to the limit include insured depository institutions, bank holding companies, savings and loan holding companies, foreign banking organizations, companies that control insured depository institutions, and nonbank financial companies designated by the Financial Stability Oversight Council for Board supervision. The final rule will be effective on January 1, 2015.