One of the centerpieces of President Obama’s 2010 Dodd-Frank financial reform law, intended to prevent future regulators from being blindsided by another crisis, is likely to face major overhaul during the Trump era.
Congressional Republicans hope to alter and disarm the Financial Stability Oversight Council, a little-known entity with broad powers.
The council is a super-group of the heads of the top financial regulatory agencies, chaired by the treasury secretary. It has the power to investigate any potential threats to the financial system, and can “designate” any financial firm to be regulated by the Federal Reserve as though it were one of the megabanks that now face tight post-crisis rules.
Republicans, who view the council as unaccountable and argue that it raises costs throughout the financial system, have signaled their intent to dramatically limit the broad powers bestowed on it by the 2010 Dodd-Frank law.
Previewing his plans for the 115th Congress in downtown Washington, House Financial Services Chairman Jeb Hensarling said, in his ideal world, the council “would probably play no role” in regulating businesses.
“I do not believe that [the council] is adding value to our economy,” the Texas Republican said, explaining that the big-picture concerns the council addresses should instead be taken to Congress, which is accountable to the people.
Hensarling is the author of sweeping legislation to replace the Dodd-Frank law with a system that involves less regulation. That bill would strip the council of its ability to “designate” companies as systemically important, a power that Republicans have charge amounts to the ability to declare a firm “too big to fail.”
President-elect Trump himself has not weighed in on the council one way or another. Hensarling nevertheless suggested that the incoming president is likely to be on board with curbing its power, given that Trump has said he wants to get rid of Dodd-Frank and the council is “one of the more harmful aspects of Dodd-Frank.”
Even if Trump does not go along with the plan to ground the council, however, he will still play a major role in steering it by nominating the officials who staff it, starting with the treasury secretary. Of the people who Trump is said to be considering in that position, all are either bankers or skeptics of the council.
The immediate implication is that the council is not likely to be designated any firms in the immediate future. “I think they’re going to take a pause,” said Mark Calabria, director of financial regulation studies at the Cato Institute, a libertarian think tank.
To date, the council has designated only four companies as threats to the financial system. One is American International Group, the insurer whose foray into high-profile speculation with banks and subsequent collapse and bailout in 2008 prompted Congress to create the council. Another is the life-insurance company Prudential Financial.
A third is the insurer MetLife, which won a federal court case releasing it from bank-like regulation, a case that is under appeal. The fourth is General Electric Capital, the finance arm of GE, which broke itself up in part to avoid the government’s clutches.
Calabria noted that the big insurance firms, such as the notorious AIG, were the obvious selections for the council to name as systemic threats. Which other firms are likely to face designation is not as clear.
Over the past few years, the council has been studying the possibility that big asset managers and hedge funds could face some sort of extra scrutiny. The results of that inquiry, which were thought to result in industry-wide oversight rather than designations of individual firms, are now less certain.
In a statement last week, Sen. Sherrod Brown of Ohio, the ranking Democrat on the Senate Banking Committee, asked Trump not to let hedge funds escape greater oversight. “If President-elect Trump is serious about stopping Wall Street and hedge funds from ‘getting away with murder,'” he said, “he’ll make sure the council can keep doing its job.”
Peter Wallison, a financial expert at the conservative American Enterprise Institute and an ally of Hensarling’s, said he believes Trump would instead side with Republicans.
“It is unlikely that Mr. Trump’s new treasury secretary or any other new appointees will be interested in designating [systemically important institutions], so that threat to the economy is probably off the table,” Wallison wrote in an op-ed for the Wall Street Journal.
In his last meeting with the council at the Treasury last week, Secretary Jack Lew voiced his concern about what would happen if the group doesn’t constantly search for new threats to the economy.
The official Financial Crisis Inquiry Commission, the group tasked by Congress with researching the causes of the 2008 crisis, placed some blame on the fact that no one regulatory agency was tasked with surveying the overall financial system for new challenges.
Prior to the crisis, the report concluded, regulators “did not have a clear grasp of the financial system they were charged with overseeing, particularly as it had evolved in the years leading up to the crisis,” and as a result the U.S. “had a 21st-century financial system with 20th-century safeguards.”
Last week, Lew warned that similar circumstances could arise in a matter of months, rather than years or decades.
“We must resist complacency and remain vigilant to future unrest,” he said at the council meeting.
