Top Democrat Eyes Broader Authority for Financial Regulatory Council

In stark contrast to Republicans, Ohio's Sherrod Brown wants financial oversight council to have authority to designate a larger group of non-banks as "systemically important."
By Ronald Orol ,

The top Democrat on the Senate Banking Committee on Tuesday said he wants Congress to give a council of regulators responsible for identifying risks to the economy authority to designate a wider array of financial institutions beyond traditional banks as "systemically important" firms subject to tougher capital restrictions.

Specifically, Sen. Sherrod Brown, D-Ohio, said he wants to give the Financial Stability Oversight Council, or FSOC, "more teeth" and authority to designate large companies with big financial operations as "systemically important financial institutions" or SIFIs, which are subject to tougher capital and liquidity restrictions. His call contradicts his Republican colleagues' plans for FSOC.

"I don't want to just regulate activities but something more than that," Brown told reporters after speaking at a Center for American Progress conference in Washington. "When the shadow banks are not well-defined, the size of the market is not agreed on and the funding of the shadow banking system is not always clear and liquid, I think probably [we should give regulators more authority]."

Brown would become Senate Banking Committee chairman if Democrats retake the Senate in November. However, the Ohio Democrat also said that he is "more optimistic" about working with Sen. Mike Crapo, R-Idaho, who would be the chairman of the panel if Republicans continue to hold control of the Senate.

In addition to calling for broader authority for FSOC, Brown also said he was supportive of the council's move last month to remove a SIFI designation for a unit of General Electric (GE) - Get Report . He said it proves that legislation written in 2010 to limit future financial crises is working. The FSOC voted last month to remove the SIFI label on GE, which under the oversight of its CEO Jeffrey Immelt, had taken steps over the past 14 months to divest a breathtaking $180 billion in financial assets in a series of deals that ultimately convinced regulators in Washington that it was no longer a potential risk to the U.S. and global economies.

General Electric is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells (GE) - Get Report ? Learn more now.

The FSOC and its designation authority was created by the Dodd-Frank Act, legislation crafted in the wake of the 2008 financial crisis. Regulators were granted the ability to impose a package of restrictions on large "nonbank" financial institutions like GE after they failed to identify and oversee significant risk building up before the crisis at mega-insurer American International Group (AIG) - Get Report . AIG's U.S. and international operations were regulated in the period prior to the crisis by the Office of Thrift Supervision, a now-defunct regulator whose primary responsibility was U.S. savings and loan banks. AIG and Prudential Financial (PRU) - Get Report are two designated non-bank financial institutions.

Brown's suggestion that he may urge legislators to craft a new bill giving the FSOC additional authority to designate additional non-bank firms with big financial divisions stands in stark contrast to GOP legislation introduced last month that includes a provision that would repeal the FSOC's authority to designate SIFIs. A 500-page package of legislation called the Choice Act, introduced by Rep. Jeb Hensarling, R-Texas, would repeal a large part of Dodd-Frank in exchange for increased capital restrictions. The legislation isn't expected to be approved before the election but could be a starting point for deregulatory negotiations next year.

His effort also comes after the Republican position was bolstered in March when a federal court judge ordered U.S. regulators to remove MetLife's (MET) - Get Report SIFI designation, arguing that the council failed to conduct a cost-benefit analysis for whether the designation was necessary.

Brown criticized the decision, arguing that it is "pretty hard to qualify the benefits" of avoiding a financial crisis. "The side of protecting the public isn't quantified," Brown said. "Cost benefit analysis does sound like a good idea but it never works."

Drafters of the GOP legislation issued a statement arguing that the provision allowing FSOC to designate SIFIs is "one of Dodd-Frank's greatest sources of regulatory overreach" that "injects unprecedented levels of political risk" into the system. It added that the council gives its group of largely presidential appointees "the authority to dictate the range of acceptable activities and the size and scope of private financial firms."

This article originally appeared in The Deal, a sister publication of TheStreet.com focused on deals and dealmakers, on July 12. For more information about The Deal click here.

Loading ...