The ability of the Financial Stability Oversight Council to designate nonbank firms as systemically important financial institutions has come under intense scrutiny in recent months.
Many critics have called the SIFI designation just another version of “too big to fail,” the phrase that became synonymous with the bailouts of some of the nation’s largest financial institutions in the aftermath of the financial crisis, as the SIFI designation brings the nonbank under the supervision of the Federal Reserve.
But during the Monday keynote address at ABS East in Miami, Patrick Pinschmidt, the deputy assistant secretary and executive director of the FSOC, said that those characterizations are inaccurate and untrue.
“SIFI designation is not ‘too big to fail,’” Pinschmidt said during his remarks. “That’s just plain wrong.”
Pinschmidt said that the SIFI designation is designed to bring additional oversight of nonbanks in an attempt to mitigate the impact of a nonbank’s potential failure on the country’s economy.
The work of the FSOC and its power came under scrutiny during a June meeting of the House Financial Services Committee. In that meeting, Treasury Secretary Jacob Lew received pointed questions from the Republican-controlled committee on GSE reform and the “too big to fail” designation.
In the past few months, the House Financial Services Committee has passed several bills to overhaul the FSOC, including a bill that would put a six-month moratorium on the FSOC's ability to designate nonbank firms as systemically important financial institutions. The SIFI designation brings supervision from the Fed.
This could have direct impact on nonbanks handling the transfer of mortgage servicing rights to institutions such as Ocwen Financial Services (OCN), Nationstar (NSM), and Walter Investment Management (WAC), should they be designated SIFIs. These nonbanks are already facing regulatory scrutiny, and analysts question whether more is needed.
Regulations under the Dodd-Frank legislation mandate that financial institutions that fit SIFI qualifications have to meet higher capital standards and develop contingency plans for potential future failures.
Additionally, Pinschmidt spoke about the FSOC’s penchant for operating in relative secrecy.
In April, Rep. Scott Garrett, R-N.J., chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, proposed a bill that would subject the FSOC to the government in the Sunshine Act; subject the FSOC to the Federal Advisory Committee Act; require that any vote taken by the principal of a commission or board represented must first be taken by that commission or board and the principal must then in turn vote that same decision at the council; and allow for Members of Congress on the Congressional oversight committees of FSOC to be able to attend all FSOC meetings.
“The financial regulators, specifically the Federal Reserve—under the guise of FSOC and through its own actions—are in the process of fundamentally altering significant aspects of the way capital and credit are allocated in this country,” Garret said at the time. “These are tremendous changes that will carry a lasting impact on the economic vibrancy of our nation for generations. It is imperative these changes are not carried out in secret or behind closed doors.”
Pinschmidt said that the level of secrecy is important because it allows financial firms to share sensitive information without fear of it being exposed to the public.
“A delicate balance of information sharing is required,” Pinschmidt said.
But he noted that the FSOC is “continually examining how to open up more of its work to the public.”