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‘Too big to fail’ designation applied inconsistently: Report

‘Too big to fail’ designation applied inconsistently: Report

The Financial Stability Oversight Council inconsistently and arbitrarily exercises its power to designate nonbank companies “too big to fail,” according to a U.S. House Financial Services Committee report. 

The FSOC currently has the power to designate financial institutions as systemically important financial institutions subject to heightened capital requirements and reporting rules, although a legislative proposal would eliminate the controversial designation for nonbank financial institutions such as insurers. The council has used that authority to designate four nonbank institutions as SIFIs, including American International Group Inc. and Prudential Insurance Co. 

In December 2014, the council voted to designate New York-based MetLife Inc. as a SIFI, but the insurer won a court challenge against the designation in March 2016 after U.S. District Judge Rosemary M. Collyer in the District of Columbia found the FSOC’s SIFI determination “fatally flawed.” 

The District Court’s observations were not limited to MetLife, as the council took the same approach with the three other designated nonbank SIFIs, according to the report prepared by the Republican staff of the House Financial Services Committee and released on Tuesday. 

“This approach is inconsistent with the FSOC’s guidance on its designation process, which, at a minimum, raises serious issues of procedural fairness,” the report stated. “But what is of greater concern than mere issues of adherence to guidance is that this demonstrates that in its nonbank designation process the FSOC is not fulfilling its statutory mandate of actually analyzing whether companies are systemically risky.”

The council did not follow its own definitions of what constitutes a threat to the stability of the United States, meaning that designation decisions appear to have been based on factors other than the ones stated in its rules and interpretive guidance, according to the report. The FSOC did not follow its own rules and guidance in many ways, including by considering non-systemic risks in its determination of whether to designate a company as systemically important. The council’s analysis of companies has also been inconsistent and arbitrary, with the council not performing an analysis of vulnerability to financial distress for all the companies it designated as SIFIs, according to the report. 

The FSOC designated some companies as SIFIs, but declined to advance several other companies from Stage 2 to Stage 3 in its evaluation process and did not sufficiently explain its actions, according to the report. Stage 1 provides for a quantitative screening using six categories of evaluation, Stage 2 encompasses a qualitative and quantitative assessment and Stage 3 involves performance of an additional in-depth analysis to determine whether a company should be designated a SIFI. 

However, the report does not focus on the failure of individual FSOC evaluation memoranda to explain the council’s conclusions because it has been criticized for its evaluations by the district court and other parties and an exhaustive critique of nonpublic evaluation memoranda would likely require disclosure of confidential information. 

“The FSOC designation process is already an invasive and expensive process for the companies under evaluation and placing confidential, proprietary information on these firms on the public record would only compound that harm,” the report said. 

In addition, the identities of several companies that the FSOC evaluated are not publicly known, and critiques in the report might unnecessarily reveal their identities, according to the report. 

A U.S. Treasury Department spokesperson could not be immediately reached for comment. 


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