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House Passes Bills Rolling Back FSOC, Stress Testing, and Volcker Rule

The House of Representatives passed a trio of bills to restrict the Financial Stability Oversight Council’s (FSOC) systemic risk designation process, roll back stress-testing requirements on banks, and exempt small banks from the Dodd-Frank Act’s Volcker Rule. The Dodd-Frank Act empowered the FSOC, a panel made up of financial regulators and chaired by the Secretary of the Treasury, to scrutinize large and interconnected institutions whose failure would jeopardize the broader economy. The House bill would change the nonbank designation process by requiring the risk watchdog to weigh “the appropriateness of the imposition of prudential standards as opposed to other forms of regulation to mitigate the identified risks” when deciding whether to designate a firm as a SIFI.

The House of Representatives passed a trio of bills to add restrictions on the Financial Stability Oversight Council’s (FSOC) systemic risk designation process, roll back stress-testing requirements on banks, and exempt small banks from the Dodd-Frank Act’s Volcker Rule.

On April 11, 2018, H.R. 4061, the Financial Stability Oversight Council Improvement Act of 2017, passed the House 297-121, and H.R. 4293, the Stress Test Improvement Act of 2017, was approved 245-174. Legislators passed H.R. 4790, the Volcker Rule Regulatory Harmonization Act, 300-104 on April 13.

H.R. 4061 is part of a years-long effort by Republicans to create new hurdles within the FSOC’s process of designating large insurers and other nonbanks as systemically risky. The Dodd-Frank Act empowered the FSOC, a panel made up of financial regulators and chaired by the Secretary of the Treasury, to scrutinize large and interconnected institutions whose failure would jeopardize the broader economy. Its primary tool is the Systemically Important Financial Institution (SIFI) designation, which brings with it tougher prudential standards, heightened Federal Reserve scrutiny, and additional requirements such as regular stress testing and “living will” resolution planning.

Banks with $50 billion or more in assets are automatically designated as SIFIs. The FSOC is authorized to designated nonbank SIFIs case-by-case.

H.R. 4061 would change the nonbank designation process by requiring the risk watchdog to weigh “the appropriateness of the imposition of prudential standards as opposed to other forms of regulation to mitigate the identified risks” when deciding whether to designate a firm as a SIFI. The bill’s other provisions include a requirement that the FSOC reevaluate its SIFI designation every five years at the request of the firm in question.

The Obama administration used the FSOC to designate four firms as nonbank SIFIs: American International Group Inc. (AIG), General Electric Capital Corp., MetLife, and Prudential Financial Inc.

Since then, the program has mostly fallen apart, with only one institution, Prudential, still under the SIFI label.

Earlier in 2018, the FSOC dropped its appeal of a 2016 U.S. District Court ruling that tossed out MetLife’s SIFI designation. The FSOC in late September ruled that distress at AIG would not be great enough to cause another financial crisis and agreed to remove the SIFI label. GE Capital shed its designation in mid-2016, after shrinking its total assets by more than 50 percent through divestitures and other restructuring moves.

Democratic leaders opposed H.R. 4061. In a floor speech, Rep. Maxine Waters, a California Democrat and the House Financial Services Committee’s ranking member, called the measure “the latest example of the Majority’s misguided and reckless agenda.”

“H.R. 4061 helps financial institutions to delay or block heightened oversight and weakens FSOC’s ability to protect our economy,” Waters said.

H.R. 4293 amends Dodd-Frank to roll back stress-testing requirements. The bill says stress testing for certain banks will be done semiannually instead of yearly, and the number of supervisory scenarios a bank must consider would be cut to two from three, among other changes. The House passage of H.R. 4293 comes days after the Federal Reserve proposed to simplify bank capital requirements by establishing a “stress capital buffer,” which would be determined partially by the results of a bank’s stress testing. The proposed changes, according to a statement by the Fed, “would produce capital requirements for large banking organizations that are firm-specific and risk-sensitive.”

H.R. 4790, would give the Federal Reserve sole authority over the Volcker Rule, which restricts proprietary trading at banks and prohibits banks from ownership in hedge funds or private equity funds. The bill would also exempt banks with less than $10 billion in assets from the Volcker Rule.

House Financial Services Committee Jeb Hensarling, in a floor statement, praised the bill as providing “a framework that will provide increased regulatory clarity for entities that must comply with the Volcker Rule.

Waters, speaking in opposition to the bill, warned it would “would give all community banks the congressional thumbs-up to begin speculative trading instead of focusing on the traditional business of banking.”

The bill, she said “also makes community banks prime targets for hedge fund salesmen.”

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