The House of Representatives took a step toward changing the Dodd-Frank financial regulation law by passing a measure that requires that a systemic risk designation be based on more than a financial institution’s size.
The House vote was heralded by insurers, which have long argued that they do not pose a systemic risk the way nation’s largest banks do.
The bill, the Systemic Risk Designation Improvement Act, replaces an arbitrary $50 billion threshold included in the Dodd-Frank Act that regulators are using to designate so-called systemically important financial institutions (SIFI). The House voted to approve the bill by a vote of 254-161.
Companies designated as SIFIs are subject to enhanced oversight.
Rep. Blaine Luetkemeyer, (R-Missouri), the sponsor of the bill (H.R. 6392) who serves as chairman of the Housing and Insurance Subcommittee, said the bill “would protect U.S. taxpayers from actual risk posed to the financial system. Decisions on what institutions are deemed systemically important should be based not on size alone, but also on activity and other factors that actually demonstrate systemic risk.”
Proponents say the bill would more accurately reflect the true risks financial institutions pose by considering their business activities. Before they can be designated as systemically important, regulators would have to take into consideration the asset size of a bank holding company, the inter-connectedness of the institution, its complexity and the global nature of the bank holding company.
Twenty Democrats joined 234 Republicans in supporting the measure. Four of the bill’s nine co-sponsors were Democrats. No Republicans opposed it.
Rep. Jeb Hensarling, (R-Tex.), House Financial Service Committee chairman, said that former Rep. Barney Frank, (D-Mass.), the co-author of the Dodd-Frank Act, admitted in testimony in 2014 that the threshold he wrote into law is “arbitrary” and expressed support for adjusting it. He also later called the threshold a “mistake.”
“So what we’re trying to do here today with this bipartisan bill is try to provide a solution, try to fix a genuinely recognized mistake in Dodd-Frank. And what those who oppose this bill are trying to do is to preserve that mistake in the law,” said Hensarling.
Wes McClelland, vice president for Federal Affairs for the American Insurance Association (AIA), agreed with proponents.
“Given the strengths of the insurance business model, it is clear that the property/casualty industry was not and is not a source of systemic risk to the financial system. Therefore, in testing for enhanced supervision of financial institutions, the bill appropriately recognizes that risk assessment should be based on a range of factors wider than just size,” McClelland said.
Rep. Maxine Waters, (D-Calif.), the highest ranking Democrat on the committee run by Republicans, criticized H.R. 6392, characterizing it as a bill that would let President-elect Trump’s administration deregulate 27 of the largest banks in the country.
“H.R. 6392 would repeal Dodd-Frank’s $50 billion threshold, above which banks are subject to closer regulatory scrutiny, and prevent the Federal Reserve Board from regulating these banks,” Waters said. “Instead, it would hand over that responsibility to the Financial Stability Oversight Council, or FSOC. In order to regulate the banks, the FSOC would have to go through a byzantine and litigious process of designation, which takes two to four years to complete.”
Waters said that if Trump’s Treasury Secretary candidate, Steven Mnuchin, decided to regulate his former employer, Goldman Sachs, “by the time he got around to it, the damage would likely already be done.”
She added: “I suppose passing this legislation is just the Republican Congress’s way of giving him a ‘signing bonus’ for coming into government.”
Yesterday the House Financial Services Committee re-elected Hensarling as its chairman for his third term.
Today, the Democratic Caucus re-elected Waters to serve as ranking member of the committee for her third term.
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