Vote Explanation for H.R. 6392 — Systemic Risk Designation Improvement Act of 2016
In the wake of the 2008 Recession, Congress and the Obama Administration focused financial regulation on protecting the nation’s financial system from itself. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), signed into law in 2010, placed long-overdue safety and accountability measures on the industry to prevent banks and other monetary institutions from engaging in the types of dangerous activities that hurt consumers and contributed to the financial crisis.
Dodd-Frank contains two central elements designed to prevent systemic risk in the U.S. financial sector:
1) The establishment of the Financial Stability Oversight Council (FSOC), which is charged with monitoring systemic risk. The FSOC is comprised of regulators including the Fed and the Securities and Exchange Commission, and is chaired by the Treasury Secretary.
2) The requirement that any banking company with over $50 billion in assets be automatically designated a systemically important financial institution (SIFI), and must therefore undergo rigorous stress-testing along with capital, liquidity, and living will requirements to better ensure that these financial institutions are prepared for severe economic circumstances.
There are currently 33 banks that have been designated as SIFIs based on the $50 billion threshold, including JP Morgan, Bank of America, Wells Fargo, and Goldman Sachs. Of those 33 banks, 8 have been designated as global systemically important banks (G-SIBs), and must conform to even more stringent regulatory requirements.
There is a sentiment shared by both Democrats and Republicans that the $50 billion threshold set by Dodd-Frank is too low, since it captures some regional banks that do not participate in investment banking and trading, even though the collapse of large regional banks during an economic downturn could still have a systemic impact.
H.R. 6392, the Systemic Risk Designation Improvement Act of 2016 removes the automatic SIFI designation requirement for banks with assets above $50 billion. Instead, this legislation would give the FSOC authority to designate a bank as a SIFI on a case-by-case basis. This determination would require a two-thirds vote by the FSOC members, including the Secretary of the Treasury.
Further, the bill would subject only the 8 G-SIBs to enhanced prudential standards without further action by the FSOC. All other bank holding companies, including 27 of the largest banks in the nation, would have to go through an extensive review process by FSOC, to conclude with approval by the Secretary of the Treasury, before being designated a SIFI.
While the basic idea behind the bill makes sense, as there is bipartisan agreement that $50 billion is a rather arbitrary threshold, the major concern is that H.R. 6392 would give President-elect Trump’s Treasury Secretary veto authority over implementing financial stability regulations for our largest banks. Trump’s nominee for Treasury Secretary, Steve Mnuchin, is a former executive of one of the Wall Street banks implicated in the financial crisis, and until recently, served on the board of one of the largest banks in the country.
No law is ever perfect, including Dodd-Frank. While I have and will continue to be supportive of reforming this important legislation to encourage economic growth, it cannot come at the expense of consumers. I voted against H.R. 6392 last week because it would roll back important safeguards to our financial system and give a Trump-appointed Treasury Secretary — a Wall Street insider — too much discretion to determine what is in the best financial interest of the American people.