The super-group of regulators created in the wake of the financial crisis to track down threats to the financial system lacks transparency, the Government Accountability Office said Thursday in a new report.
The report, requested by Republican Sen. Mike Crapo of Idaho, will validate the complaints of congressional Republicans that the regulatory group known as the Financial Stability Oversight Council is unaccountable.
The GAO specifically addressed the council’s process for identifying threats that come from outside Wall Street. The council, which comprises the heads of all the major financial regulatory agencies, has the power to designate non-bank firms “systemically important financial institutions” and regulate them as if they were banks.
That process, the GAO concluded, “lacks full disclosures and transparency in certain areas” and relies too heavily on judgment rather than data.
Before naming any more companies systemically important, Crapo said, the council’s “activities must be transparent and objective, with clearly outlined criteria when such designations are appropriate.”
In a statement on the GAO report, Crapo said that “the non-bank [systemically important financial institution] designation process has proved immeasurable and unclear, with serious regulatory consequences for firms that receive the designation that will inevitably translate into higher costs for consumers and the overall economy.”
The council has named insurance company Prudential Financial and General Electric Capital Corp. systemically important, as well as insurer American International Group, whose 2008 collapse led to the call for a government body like the council.
This fall, the council moved to designated life insurer MetLife systemically important, a label it has challenged. Before the regulators took that step, House Republicans moved legislation to halt such designations until the council made its process clearer.
While the GAO report faulted the council for some failures in transparency in the designation process, it also found that it might not be labeling enough companies systemically important. The council “may not be able to ensure that it identifies and ultimately designates all nonbank financial companies that may pose a threat to U.S. financial stability.”
In response to the GAO report, the Treasury Department’s acting undersecretary for domestic finance, Matthew Rutherford, noted that the council was already working on improving its transparency and communications with businesses.
“The council is committed to conducting its work in an open and transparent manner,” Rutherford wrote.
