Waters Discusses FSOC's Designation Process
At today’s full Committee hearing on the Financial Stability Oversight Council’s (FSOC) designation process, Congresswoman Maxine Waters, Ranking Member of the Financial Services Committee, discussed the importance of the FSOC process in giving Congress and regulators the comprehensive view of the entire market necessary to identify and mitigate systemic risks.
Waters also reminded the Committee of the failure of markets to police themselves in the lead up to the financial crisis, as well as the inability of regulators to address the predatory practices of Wall Street. While emphasizing that the FSOC’s actions need to be tailored in a way that mitigates specific risks appropriate to each industry, she underscored the importance of supporting the Wall Street Reform Act and the Council’s mission to prevent any one company or risky activity from ever threatening the American economy again.
Her full remarks are below.
As prepared for delivery:
“Thank you Mr. Chairman.
Six years ago this March, our regulators were faced with the first of many difficult decisions related to the financial crisis –bailout Bear Stearns or risk its bankruptcy spreading instability worldwide. This was the first of several interventions during an economic collapse that resulted in the destruction of trillions of dollars of wealth, millions of families’ economic livelihood, and the world’s confidence in our markets and our way of life.
Despite the revisionist views of my Republican colleagues, this crisis resulted, in part, from an inability of markets to police themselves, which was compounded by the inability of the previous Administration and regulators to stop predatory practices on Wall Street. At the end of the day, Wall Street’s greed had disastrous effects on Main Street.
As we picked up the pieces, we learned that regulators lacked authority to regulate entire markets – such as the $600 trillion dollar over-the-counter derivatives market. Even worse, they did not have a comprehensive understanding of companies they regulated, like AIG.
For example, state regulators were barred from regulating AIG’s derivatives as insurance products. But at the same time, neither federal regulators – nor AIG’s own executives – understood the massive risks it was taking.
Democrats responded to the massive vulnerabilities in our system by enacting the Wall Street Reform Act, which created the Financial Stability Oversight Council (FSOC) to identify such risks and take the steps necessary to prevent them from threatening our economic well-being.
Because of the FSOC, supported by the Office of Financial Research, we now have a more complete view of the entire market. And when necessary, the FSOC can subject financial firms to safeguards intended to prevent certain threats from harming the economy – and it can make recommendations to address risky activities or practices.
Congress determined as a starting point that the FSOC should look at all bank holding companies with more than $50 billion dollars in assets, but also directed the Council to look more broadly. Any firm or activity whose unregulated risk could create an economic pandemic should be identified and dealt with now – before it is too late.
To date, the FSOC has identified two insurance companies that fit this designation, AIG and Prudential, as well as a finance company, GE Capital.
It’s important to note that these companies weren’t just singled out without evidence – FSOC has provided an informative, detailed analysis that paints a picture of their exposure. For example, in the case of AIG, the FSOC determined that a large number of corporate and financial entities have significant exposures in its capacity as a global insurer, and could suffer losses in the event of financial distress at AIG.
While these designations must be made on a strong analytical basis, at the same time, I support a strong appeals process if industry stakeholders feel as if FSOC got it wrong. However – to date, I have not seen anything to suggest that FSOC’s appeals process has failed.
The financial crisis demonstrated a need for heightened supervision of nonbank financial institutions, not just in the U.S., but globally as well.
That’s why I have been mystified to see FSOC’s decisions criticized as foregone conclusions based on the recommendations of the international coordinating body, the Financial Stability Board (FSB). Not only is there not a shred of evidence that supports this theory, but these critics are missing the point. Constructive engagement by U.S. representatives with the FSB and the global boards coordinating insurance and securities regulation promote our global financial stability.
Mr. Chairman, we in Congress have been clear that we expect FSOC’s actions to be crafted in a way that mitigates specific risks. ‘One size fits all’ solutions are more likely to cause harm than promote stability.
But I believe Congress must continue to support the Wall Street Reform Act. And as a result, we must hold the FSOC accountable to its mission to prevent any one company or risky activity from ever threatening our livelihood again.
Thank you, I yield back.”