By politicizing the allocation of mortgage credit beyond the level that was possible with Freddie and Fannie, the bill proposed by Sen. Tim Johnson and Sen. Mike Crapo manages to make the affordable-housing provisions of current policy worse.
Since the financial crisis in 2008, central bankers and bank regulators world-wide have repeatedly called for controls on "shadow banking." But if bank regulators get their way, much of the U.S. financial system will lose its capacity for risk-taking as well as its dynamism, innovativeness and flexibility. And the U.S. economy would not be any safer.
In September 2013, the Financial Stability Oversight Council (FSOC) designated Prudential Financial as a systemically important financial institution (SIFI); its rationale was perfunctory and data-free, suggesting that the FSOC sees no need to justify its designation decisions. Congress must step in, and quickly, before this pattern continues.
Congress should rein in the tendency of the FSOC to simply implement the decisions of the FSB in the US. The FSOC’s decisions on SIFI designations should be made on the basis of clear standards and guidelines; it cannot be simply a matter of regulatory discretion.
Under Dodd-Frank, FSOC has the authority to designate any financial firm as a systemically important financial institution if the institution’s “financial distress” will cause “instability in the US financial system.” Unless the power of the FSOC is curbed by Congress we may see many of the largest non-bank financial firms brought under the control of the FSOC and ultimately the Fed.
The Shadow Financial Regulatory Committee (SFRC) is a group of publicly recognized independent experts on the financial services industry — including experts in banking, insurance, and securities — who meet regularly to study and critique regulatory policies affecting this sector of the economy.
It is difficult to see how asset managers, of whatever size, could create systemic risk. By moving against an industry that cannot create systemic risk, the FSB and FSOC showed that their ambition wasn’t to prevent the next financial crisis, but instead to extend their power. That alone should be reason for repealing the authority of the FSOC under the Dodd-Frank Act.