House adopts legislation to overhaul nonbank ‘too big to fail’ process

The U.S. House of Representatives has adopted legislation that would overhaul the Financial Stability Oversight Council’s process for designating nonbank financial institutions as “too big to fail.”

H.R. 4061, the Financial Stability Oversight Council Improvement Act of 2017, sponsored by Rep. Dennis Ross, R-Florida, and Rep. John Delaney, D-Maryland, was adopted by the House by a 297-121 vote.

The bill would reform the FSOC’s designation process to “enhance the transparency and procedural fairness of the nonbank systemically important financial institutions designation process and address bipartisan concerns regarding the FSOC’s articulated approaches previously used to designate or consider the designation of nonbanks,” according to a statement published by the House Financial Services Committee on Wednesday.

The bill does not go as far as previous proposals that would have repealed the council’s authority to designate firms as SIFIs. While the FSOC will retain the power to make a determination regarding any nonbank financial company, the bill would afford affected institutions a greater opportunity to be heard by the regulator and to modify its business, structure or operations prior to designation, according to the statement.

In July 2013, the council voted to designate New York-based American International Group Inc. and Norwalk, Connecticut-based General Electric Capital Corp. Inc. as SIFIs. But in September, the council rescinded AIG’s designation by a 6-3 vote. 

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.” That decision was being appealed by the federal government until both sides jointly asked the court to dismiss the litigation in January.

In June 2016, the council voted to rescind GE’s SIFI designation after the company changed its business by divesting assets and changing its funding model. 

Newark, New Jersey-based Prudential Financial Inc. was also designated as a SIFI in September 2013, but some experts predict that Prudential’s SIFI designation will also soon be rescinded.

Prior to the vote, Nat Wienecke, senior vice president of federal government relations at the Property Casualty Insurers Association of America, issued a statement encouraging the House to pass the bill.

“The overwhelming consensus among insurance experts is that traditional insurance activities are not systemically risky,” he said in the statement on Tuesday. “But in the past, that has not stopped FSOC from designating some insurers as systemically risky and then refusing to provide a clear path toward de-designation.”

“PCI has long-argued for a clear off-ramp for companies to take action to eliminate activities that FSOC believes pose systemic risk,” he continued. “When FSOC fails to provide an off-ramp, it causes (the Dodd-Frank Wall Street Reform and Consumer Protection Act) to fail in its mission to eliminate perceived systemic threats to the economy. This bipartisan bill is a solution.”