Designation of systemically important financial institutions by the Financial Stability Oversight Council and the Financial Stability Board

Article Highlights

  • There is strong evidence that most of the members of the FSOC know little about the decisions they are asked to make

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  • Congress should be way of the FSOC's extraordinary discretionary authority

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  • Subjecting "shadow banks" to bank-like prudential regulation could seriously damage the economy

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Chairman Hensarling, Ranking Member Waters, and members of the committee:

Thank you for the opportunity to testify this morning on the designation of systemically important financial institutions (SIFIs) by the Financial Stability Oversight Council (FSOC). I believe this issue deserves serious attention by Congress. I am Peter Wallison, Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute. The views expressed in this testimony are my own and not necessarily those of the American Enterprise Institute.

Financial services is one of the most important and successful industries in the United States. It includes banks, of course, as well as insurers, asset managers, securities broker-dealers, finance companies, private equity firms, and hedge funds, among others. The services of these companies enable main-street Americans to buy and sell assets, and to save for the future to purchase a home, send children to college or retire comfortably. As important, financial services channel these savings into financing for business, which in turn creates jobs and—through growth in productivity—improves the standard of living for all of us.

Although some observers of the financial markets favor more regulation than others, it is not in dispute that financial regulation can have a significant effect on the performance of financial institutions, and thus on economic growth. For this reason, Congress should have a major role in formulating the policies that underlie the regulatory decisions that affect the US financial industry. However, in the case of banking regulation, Congress has generally not intervened in the development of the bank capital regulations. Basel I, II and III were developed by bank regulators , approved by an international agreement among bank regulators, and subsequently applied to the US banking industry. Later in this testimony, I discuss reasons why congressional abstention from this process was not a good idea.

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