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97–398 PDF 2016

S. HRG. 114–103

THE ROLE OF THE FINANCIAL STABILITY BOARD

IN THE U.S. REGULATORY FRAMEWORK

HEARING

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED FOURTEENTH CONGRESS

FIRST SESSION

ON

EXAMINING THE ROLE OF THE FINANCIAL STABILITY BOARD ON U.S. 

REGULATORS INCLUDING WITH RESPECT TO ITS INFLUENCE ON THE 

FINANCIAL STABILITY OVERSIGHT COUNCIL

JULY 8, 2015

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

Available at: http://www.fdsys.gov/


BANKI-41578DSA with DISTILLER
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

RICHARD C. SHELBY, Alabama, Chairman

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

JERRY MORAN, Kansas 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana

WILLIAM D. DUHNKE III, Staff Director and Counsel 

MARK POWDEN, Democratic Staff Director

JELENA MCWILLIAMS, Chief Counsel 

ELAD ROISMAN, Senior Counsel

LAURA SWANSON, Democratic Deputy Staff Director 

GRAHAM STEELE, Democratic Chief Counsel 

ELISHA TUKU, Democratic Senior Counsel

DAWN RATLIFF, Chief Clerk 

TROY CORNELL, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor

(II)


BANKI-41578DSA with DISTILLER
CONTENTS

WEDNESDAY, JULY 8, 2015

Page

Opening statement of Chairman Shelby ................................................................ 1

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 2

WITNESSES 

Dirk Kempthorne, President and CEO, American Council of Life Insurers ....... 4

Prepared statement .......................................................................................... 32

Peter J. Wallison, Arthur F. Burns Fellow in Financial Policy Studies, American Enterprise Institute ..................................................................................... 6

Prepared statement .......................................................................................... 36

Paul Schott Stevens, President and CEO, Investment Company Institute ........ 7

Prepared statement .......................................................................................... 47

Eugene Scalia, Partner, Gibson, Dunn & Crutcher LLP ..................................... 9

Prepared statement .......................................................................................... 72

Adam S. Posen, President, Peterson Institute for International Economics ...... 10

Prepared statement .......................................................................................... 88

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Prepared Statement of Michael S. Barr, The Roy F. and Jean Humphrey 

Proffitt Professor of Law, University of Michigan Law School ........................ 93

Prepared statement of Chris Brummer, J.D., Ph.D., Professor of Law, Georgetown University Law Center ............................................................................... 95

Prepared statement of the National Association of Mutual Insurance Companies ........................................................................................................................ 98

Prepared statement of the Property Casualty Insurers Association of America 103

(III)


BANKI-41578DSA with DISTILLER

BANKI-41578DSA with DISTILLER
(1)

THE ROLE OF THE FINANCIAL STABILITY 

BOARD IN THE U.S. REGULATORY FRAMEWORK 

WEDNESDAY, JULY 8, 2015

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:01 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Richard Shelby, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY 

Chairman SHELBY. The hearing will come to order. 

Today the Banking Committee will examine the role of the Financial Stability Board, or what we call the ‘‘FSB,’’ in our domestic 

regulatory framework. 

The FSB is an international body that monitors and makes recommendations about the global financial system. It was established 

in April 2009 by the G–20. 

Most of the members of the FSB are political appointees and 

banking regulators. The three U.S. regulators who are members of 

the FSB are the Treasury, the Federal Reserve, and the SEC. 

As I mentioned at a Banking Committee hearing on the FSOC 

in March, the FSB is not a U.S. regulator, and it is not accountable 

to Congress or the American people. 

At this same hearing, when asked about whether the FSB has 

the power to designate U.S. firms as ‘‘systemically risky,’’ Secretary 

Lew acknowledged, and I will quote him, that ‘‘the FSB cannot designate a firm for us.’’ And yet Secretary Lew could not recall any 

particular instance in which the FSOC had deviated from the FSB. 

Interesting. 

Furthermore, two out of the three insurance companies that the 

FSOC has designated were first designated by the FSB. The question that appears is whether FSB designations have become a substitute for the independent judgment of our regulators. And if they 

have, what do we know about the FSB’s designation process? 

The U.S. regulatory process should be open and transparent and 

should encourage public participation in the rulemaking process. 

Because the FSB process is opaque and devoid of public participation, very little is known about the specifics of its deliberations. 

There remains much uncertainty regarding how a consensus is 

reached and the degree to which U.S. regulators are involved in 

FSB decisionmaking. 


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2

Ultimately, the FSB process should not allow U.S. regulators to 

avoid our own rulemaking process or congressional oversight. 

In past hearings we have heard from the Treasury, the Fed, and 

insurance experts, among others, about the interplay between the 

FSB and the FSOC. Today the Committee here will receive testimony from those affected by the FSB process as well as experts 

who have studied and analyzed the FSB and its impact on U.S. 

companies. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman. Welcome to the five 

witnesses today. Thank you for joining us. 

This month, as we know, marks the fifth anniversary of the passage of Dodd-Frank and the Consumer Protection Act, over 7 years 

since the worst crisis since the Great Depression began to spread 

through the global financial system. 

As the months and years pass, we cannot forget that damage 

that was done because we are still living with the after effects. 

This Committee can never forget that in its deliberations. We continue to see the damage done to Americans’ finances and their 

lives. We must make sure that financial reform continues. That reform should not stop at the edge of our shores. 

The financial crisis showed us and showed the world how interconnected our financial system had become, how fragile and fragmented the regulatory system actually is. 

In 2009, the leaders of the G–20 nations outlined an agenda, 

agreed to an agenda to guide international financial reforms and 

‘‘too big to fail.’’ Improved capital standards make markets more 

transparent and resilient. 

The Financial Stability Board was formed, and international reform initiatives were launched. We have heard over and over in 

this room the importance of international cooperation and the need 

for improved global standards. 

In September 2009, SEC Commissioner Casey testified before a 

Banking Subcommittee, ‘‘International cooperation is critical for 

the effectiveness of financial regulatory reform efforts. The G–20 

banking statement . . . ’’ she went on, ‘‘ . . . correctly recognizes 

that, due to the mobility of capital in today’s world of interconnected financial markets, activities can easily shift from one 

market to another.’’ She continued: ‘‘Only collective regulatory action can be effective in fully addressing cross-border activity in our 

global system.’’

In March 2012, Treasury Under Secretary Brainard appeared before this Committee and said, ‘‘We have secured agreement internationally to strengthen liquidity standards and limit leverage. We 

have identified the globally systemically important banks. We have 

agreed to a capital surcharge for these banks. We have developed 

a comprehensive set of enhanced prudential measures to address 

risks from globally active financial institutions.’’

She continued: ‘‘However, there is much work that needs to be 

done. We must remain vigilant against attempts to soften the national application of new capital and liquidity and leverage rules.’’


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These statements, Mr. Chair, only begin to explain the need for 

international coordination and financial regulation, not a new concept. Basel dates back to the mid-1970s. The Financial Stability 

Forum, the predecessor to FSB, was formed 16 years ago. Crossborder cooperation is important because just in recent memory we 

have seen several domestic and international financial crises. From 

the savings and loan crisis in the 1980s and 1990s, the bailout of 

Mexico in the mid-1990s, the Asian financial crisis in 1997, which 

led to the failure and bailout of the hedge fund Long-Term Capital 

Management, through to the financial crisis, and the default and 

uncertainty facing Greece right now, we know that another financial crisis can happen and that it will happen. It will affect more 

than any single nation. 

It is the desire to prevent the next crisis that should drive us to 

broad global efforts and higher regulatory standards so that no 

market falls behind and allows unchecked risk to accumulate. The 

world cannot afford another AIG or Lehman. To make sure it does 

not have to, the United States has led global reforms, passing comprehensive Wall Street reform quickly in 2010, pushing for higher 

capital requirements, improving derivatives regulation, building 

out resolution mechanisms. 

We can and need to do more. Risks do not just build up overseas. 

They build up here in the shadows. Yesterday, IMF released its 5-

year financial sector assessment of the United States. It identified 

several areas of so-called shadow banking where we still have work 

to do. We need to address gaps in regulation and oversight. We 

need to ensure that regulators communicate globally. We need to 

expose areas where excessive risk develops. 

Given that all the systemic risk questions have not been answered and regulations are still being considered and implemented, 

it is clear our work is not done. I hope today’s witnesses will highlight the importance of international coordination to a stable financial system. It would be a shame if instead criticism of a nonbinding international coordinating body were used to weaken or 

stop the kinds of safeguards needed to prevent the next AIG. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Thank you. Thank you, Senator Brown. 

Without objection, at this point I would like to enter into the 

record statements from the following organizations: Property Casualty Insurance Association of America and the National Association of Mutual Insurance Companies. Without objection, it is so ordered. 

Senator BROWN. Mr. Chairman, excuse me a second. If I could, 

Mr. Chairman, I have two statements I would like entered into the 

record: one from Michael Barr, University of Michigan Law School, 

and one from Professor Christopher Brummer of Georgetown Law 

School. 

Chairman SHELBY. Without objection, so ordered. 

Senator BROWN. Thank you, Mr. Chairman. 

Chairman SHELBY. They will be part of the record. 

Our witnesses today—I think we have a distinguished panel 

here—include the Honorable Dirk Kempthorne. He is no stranger 

to a lot of us. He is President and the CEO now of the American 

Council of Life Insurers. Governor Kempthorne has had a distinVerDate 0ct 09 2002 11:57 Dec 20, 2016 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 L:\HE3E8B~1\07-08T~1.REG\HEARING\97398.TXT SHERYL

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4

guished public service career and has previously served as Secretary of the Interior as well as mayor, U.S. Senator, and Governor 

of Idaho. Dirk, thank you. 

Peter Wallison is no stranger to this Committee either. He is 

well known and distinguished in his own right. He is the Arthur 

F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute. Mr. Wallison has held a number of Government and 

private sector positions over his notable career, and the Committee 

welcomes him again. 

Mr. Paul Schott Stevens is President and CEO of the Investment 

Company Institute. Mr. Stevens is a well-known lawyer and previously served in senior Government positions at the White House 

and the Defense Department. 

Mr. Eugene Scalia is a Partner at Gibson, Dunn & Crutcher. Mr. 

Scalia is a renowned administrative law scholar and practitioner 

who previously served as U.S. Solicitor at Labor and as a Special 

Assistant to the Attorney General of the United States. 

Dr. Adam Posen, the President of the Peterson Institute for 

International Economics, will be our fifth witness. Dr. Posen is a 

member of the Council on Foreign Relations. He previously served 

as an external member of the Bank of England’s rate-setting Monetary Policy Committee. 

All of your full written testimonies will be made part of the hearing record, and, Dirk, we will start with you. 

STATEMENT OF DIRK KEMPTHORNE, PRESIDENT AND CEO, 

AMERICAN COUNCIL OF LIFE INSURERS 

Mr. KEMPTHORNE. Mr. Chairman, thank you so much. Chairman 

Shelby, Ranking Member Brown, and all Members of the Committee, thank you for this opportunity. 

I would like to begin with a sincere thank you for shepherding 

through Congress last year important legislation that the Federal 

Reserve needed. Enactment of the Insurance Capital Standards 

Clarification Act, a fix to the Collins amendment, should enable the 

Federal Reserve to appropriately account for the fundamental differences in business models between banking and insurance. This 

was Congress at its best, bipartisan work to enact essential legislation. 

ACLI is the principal trade association for the U.S. life insurance 

industry. Life insurers offer real solutions to help millions of American families. We help people plan and save for retirement. We 

help people cope when a loved one dies. We help people who are 

disabled and need long-term care. Government will face more problems without the solutions offered by life insurers. 

I offer three observations: 

First, the Financial Stability Oversight Council should utilize an 

activities-based approach to identifying systemic risk rather than 

designate individual companies based merely on size. 

Second, the Federal Reserve should finalize their work on capital 

standards in a way consistent with congressional intent. 

Third, common sense and good policy certainly should require 

that the United States write its own insurance capital standards 

before agreeing to any international standards. Getting our standards completed at home and done right needs to happen first. This 


BANKI-41578DSA with DISTILLER
5

will require Congress to continue proper oversight of the work of 

Federal agencies who represent the United States on the Financial 

Stability Board, the International Association of Insurance Supervisors, and FSOC should also be subject to congressional oversight. 

I thank Chairman Shelby and Senators Heller and Tester for including language in pending legislation to increase opportunities 

for stakeholder input and congressional oversight. 

With respect to capital standards, ACLI is grateful that the Federal Reserve will proceed with a methodical process that will include a formal rulemaking and public comment period. ACLI also 

commends the FSB and FSOC for considering an activities-based 

approach for assessing the potential risks of asset managers before 

systemic designations. 

Yet with respect to insurers, I am troubled by the fact that these 

two organizations have made no similar effort. Instead, these organizations have chosen to designate individual companies as SIFIs 

without providing insight into the rationale for such designations 

or how the designations could have been avoided. 

The fact is that the FSB named institutions as ‘‘globally systemic 

important insurers,’’ or G–SIIs, and the FSOC followed suit. Designated companies were not accorded any ability to engage directly 

with the FSB over its review or to challenge a designation. The 

process is closed and opaque. 

In a similar lack of transparency, FSOC also pursued the designation of individual insurance companies and provided the public 

with little, if any, rationale. FSOC’s only independent voting insurance expert, Roy Woodall, former commissioner in Kentucky, raised 

serious concerns over the intersection between the FSB’s actions 

and FSOC’s decisionmaking. To quote Mr. Woodall, ‘‘Although not 

binding on the Council’s decision, the declaration of Prudential as 

a G–SII by the FSB based on the assessment by the U.S. and global insurance regulators, supervisors, and others who are members 

of the IAIS has overtaken the Council’s own determination process.’’

A relevant issue is how a company once designated a SIFI can 

exit being a SIFI. In other words, what is the off ramp to exit the 

SIFI highway? The answer to that question will help companies 

understand how they became SIFIs in the first place. Chairman 

Shelby, I thank you for working to provide the off-ramp exit in 

pending legislation. 

It is important for the Federal Reserve’s capital standards and 

the FSB’s international capital standards to work in harmony, not 

in conflict. Quite frankly, there should be no rush in writing international capital standards for insurance companies in a very short 

period of time. After all, consider: It took 13 years to write Solvency II. It took 11 years to write Basel II. Life insurers want 

international standard setters to take the time to get it right, to 

avoid adverse or unintended consequences. This will help preserve 

the ability of insurers to provide financial and retirement security 

to millions of families. 

To quote Senator Tim Scott, ‘‘the more successful the insurance 

company industry is, the less Government will have to do.’’ We 

should embrace policies that enable Government to focus on those 

who are truly needy. 


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6

Mr. Chairman, that is why the issues that you have presented 

here today with the Committee are so vitally important. Thank you 

for being vigilant in guarding against unintended consequences of 

regulatory action wherever and whenever they occur. 

Thank you, Mr. Chairman. 

Chairman SHELBY. The Honorable Peter Wallison, welcome 

again. 

STATEMENT OF PETER J. WALLISON, ARTHUR F. BURNS FELLOW IN FINANCIAL POLICY STUDIES, AMERICAN ENTERPRISE INSTITUTE 

Mr. WALLISON. Thank you, Chairman Shelby, Ranking Member 

Brown, and other Members of the Committee. Both the Financial 

Stability Board and the Fed have made clear in public statements 

that they want to impose prudential regulation on what they call 

the ‘‘shadow banking system.’’ Both defined ‘‘shadow banking’’ as 

all financial intermediation outside the regulated banking system. 

This means broker-dealers, asset managers, mutual funds, insurance companies, hedge funds, and any other firm that is not a regulated bank. 

Prudential regulation is the regulation of risk taking. This is normally the prerogative of a firm’s managers. So what the FSB and 

the Fed mean by placing shadow banking under prudential regulation is they want to control the risk taking of firms in the capital 

markets. This would be a major change in the capital markets 

where firms are generally regulated for conduct and not told by 

regulators what risks are permissible. The free capital markets in 

the United States are the source of our economic growth. Prudential regulation would end that freedom. 

The Treasury and the Fed are members of the FSB. Treasury 

Secretary Lew has repeatedly denied that the United States is 

bound by decisions made at the FSB. He told the House Financial 

Services Committee, ‘‘We work in the FSB to try to get the kinds 

of standards that we think are appropriate in the United States to 

be adopted around the world.’’ This tells us two things: 

First, FSB is important because it provides a forum for negotiating rules that will be globally effective. The Fed cannot control 

shadow banking from the United States alone. 

Second, Secretary Lew’s statement makes sense only if the FSB’s 

decisions can be implemented in the United States. No other country will abide by the FSB’s decisions if the United States does not. 

This raises the question where the Treasury and the Fed think 

they have gotten the authority to implement the FSB’s decisions in 

the United States. 

Unfortunately, it may be in the Dodd-Frank Act. Section 113 of 

Dodd-Frank says that the FSOC can designate a firm of any size 

as a SIFI if its mix of activities could cause instability in the U.S. 

financial system. 

A year ago, Fed Governor Daniel Tarullo, who leads the FSB’s 

efforts on shadow banks, said it was necessary ‘‘to broaden the perimeter of prudential regulation both to certain nonbank financial 

institutions and to certain activities of all financial actors.’’ The key 

word here is ‘‘activities.’’


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In 2013, in outlining how it would regulate shadow banks, the 

FSB stated that ‘‘risk creation may take place at an entity level’’—

what they mean is in a SIFI, a single institution—‘‘but it can also 

form part of a complex chain of transactions’’—still quoting here—

‘‘in which leverage and maturity transformation occur in stages.’’

This is a highly implausible idea, I think, but it is the foundation 

of the FSB’s efforts to impose prudential regulation on the shadow 

banking system. The FSB would do it through controlling ‘‘complex 

chains of transactions.’’ But this is how business is done in the capital markets. Firms there buy, sell, securitize, finance, and trade 

risks and assets through complex chains of transactions. 

Recently the Fed’s Vice Chair, Stanley Fischer, adopted the same 

idea, saying in a speech that, ‘‘A complex chain of activity can increase the likelihood or severity of systemic stress.’’ Thus, it appears that a global effort to control shadow banking will probably 

be based on an FSB agreement to regulate complex chains of transactions. But in the United States, because of the Dodd-Frank language quoted earlier, it will be based on regulating complex chains 

of activities. 

Thus, the FSOC could threaten to designate nonbank firms as 

SIFIs if they do not cease a certain class of activities—unless the 

Fed approves the activity. That would, in effect, give the Fed the 

authority to approve activities only if done under the Fed’s prudential rules. 

If this Committee does not want to see prudential regulation of 

the capital markets, it has to make clear to the FSOC and the Fed 

that the term ‘‘activities’’ in Dodd-Frank cannot be used for this 

purpose. 

Thank you very much for the opportunity to testify this morning. 

Chairman SHELBY. Mr. Stevens. 

STATEMENT OF PAUL SCHOTT STEVENS, PRESIDENT AND 

CEO, INVESTMENT COMPANY INSTITUTE 

Mr. STEVENS. Thank you, Chairman Shelby, Ranking Member 

Brown, Members of the Committee. I am grateful for this opportunity to discuss the FSB and the role it plays internationally as 

well as here in the United States. 

The Investment Company Institute is an association whose members include mutual funds and other regulated funds in the United 

States and in jurisdictions worldwide. ICI understands the importance of sound, tailored regulation in maintaining strong and resilient financial activities in a financial system. 

In recent years, we have made numerous submissions to the 

FSB, including detailed responses to its successive consultations on 

asset management. Our experience with these consultations and 

with FSB more generally raises very serious concerns. 

FSB asserts a very broad mandate, no less than the stability of 

the entire global financial system; but most of its members and virtually all of its leadership consists of central bankers or finance 

ministry officials. The FSB describes its efforts in the asset management sector as a review of ‘‘shadow banking.’’ This disparaging 

term reflects the FSB’s bias that all financial activity conducted 

outside of banks is inadequately regulated and, therefore, is ‘‘risky’’ 


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because it is not subject to bank standards and bank regulatory supervision. 

Compounding this predisposition are FSB’s broad lack of expertise on funds and capital markets as well as its insufficient regard 

for empirical evidence on the regulated fund industry, including 

our historical experience, structure and practices, and existing form 

of regulation. 

As a result, FSB’s proposed methodology for G–SIFI designation 

proceeds on the basis of flawed assumptions and mere conjecture. 

Indeed, they appear almost reverse engineered to result in possible 

designation of certain large U.S. asset managers and the largest 

U.S. mutual funds. 

Now, this is ironic. Unlike banks, the group of U.S. stock and 

bond funds that FSB would single out for possible designation demonstrated a high degree of stability during the financial crisis. 

Why? As we have repeatedly explained to FSB, mutual funds use 

little to no leverage. They do not ‘‘fail’’ like banks and do not require Government intervention. Their structure and regulation 

limit risk as well as the transmission of risk. And as history has 

repeatedly demonstrated, they do not experience ‘‘runs’’ or ‘‘fire 

sales’’ during times of stress. 

In our view, FSB is not conducting its work with the same degree of rigor required of regulators in this country, nor is it operating with the same kind of transparency. We do not know the positions that U.S. representatives have taken on the methodologies 

proposed by FSB for possible G–SIFI designation. We do know that 

the whole work stream in this area is being led by the Fed. 

It does seem plain that there are extensive links between FSB 

and FSOC. It seems certain that any final FSB methodology for 

possible G–SIFI designation of mutual funds and their managers, 

no matter how deeply flawed it may be, will influence FSOC’s own 

review of asset management and financial stability. 

In our judgment, a sector-wide appraisal of activities and practices is the best way to evaluate any potential risks in asset management. The Board of the International Organization of Securities 

Commissions, a global group of securities regulators with long experience in overseeing funds and asset managers, has recommended that a review of asset management activities ‘‘take precedence’’ over consideration of individual funds or asset managers as 

systemically important. 

Clearly, FSB’s work would be far better informed and far more 

effective if FSB were reconstituted to accord capital markets regulators an equal place and an equal voice at the table. It would appear that for both FSB and FSOC, however, designation of mutual 

funds or their managers remains a live policy option. Subjecting 

U.S. mutual funds or their managers to bank-like regulation will 

harm millions of Americans saving for long-term goals like retirement. The direct costs will be substantial while the overlay of enhanced prudential supervision will introduce a highly conflicted 

form of regulation, clearly not in the best interests of fund shareholders. So, in sum, ICI strongly commends this Committee for its 

oversight of the role of U.S. regulators in the FSB. 

Regarding FSOC’s designation process, ICI believes that before 

designating a company, FSOC should be required to specifically 


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identify any risks and communicate those risks to the company and 

its primary regulator. It should provide a more meaningful role for 

the primary regulator to address risks, and it should provide companies under consideration with the opportunity to ‘‘de-risk’’ prior 

to designation. 

We, therefore, strongly support Chairman Shelby’s efforts to reform FSOC’s designation process and are pleased that he has included these common-sense reforms in Title III of S. 1484, the Financial Regulatory Improvement Act. 

Mr. Chairman, thank you for the opportunity to present our 

views. I look forward to your questions. 

Chairman SHELBY. Thank you. 

Mr. Scalia. 

STATEMENT OF EUGENE SCALIA, PARTNER, GIBSON, DUNN & 

CRUTCHER LLP 

Mr. SCALIA. Chairman Shelby, Ranking Member Brown, and 

Members of the Committee, thank you for the opportunity to appear before you today. It is an honor. 

I speak to you today not as an expert on financial institutions, 

but as a lawyer who practices administrative law and who has represented clients in connection with the Financial Stability Board 

and designation as a systemically important institution by FSOC. 

This includes representing MetLife in connection with its designation as a SIFI, but today I testify in my individual capacity and not 

on behalf of any clients. The views I will express are my own. 

I would like to touch on three legal points that I hope may frame 

the Committee’s consideration of the FSB. 

First, it is a basic principle of administrative law that, in the 

words of one court, an agency should not ‘‘adjudge the facts or law 

of a particular case in advance of hearing it.’’ So in one case, the 

court found that there had not been due process of law when an 

agency decisionmaker had made a speech indicating that he had already reached a decision on a matter that was currently pending 

in a case before him. The person who had given the speeches was 

not the only decisionmaker involved in those proceedings, but the 

court in the case said, ‘‘Litigants are entitled to an impartial tribunal, whether it consists of one person or 20.’’ And it added that 

there was no way of knowing what influence that one member had 

had. 

There is no record of the role the U.S. members played in the 

FSB’s designation of the three U.S. insurance companies we have 

heard about as systemically important. But to the extent that one 

or all of the U.S. members joined in those designations by FSB, it 

becomes a legitimate subject of inquiry what effect that subsequently had in FSOC proceedings. 

Second, and related, the designation process before FSOC must 

not serve as a forum for implementing decisions essentially already 

made before the FSB. Dodd-Frank sets forth specific criteria for 

FSOC to apply. The FSB criteria are different to the extent that 

they can be discerned at all. Most important, Dodd-Frank establishes procedures for FSOC to reach its decisions. Under law, those 

procedures must present companies a real and genuine opportunity 

to make their case before open-minded decisionmakers. 


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The statements you have heard by FSOC Member Woodall that 

FSB’s designations have ‘‘overtaken’’ FSOC’s designation process 

are troubling. By way of analogy, if the judge wrote in dissent that 

her colleagues had based their decision on considerations other 

than applicable law, the facts in the record, and the explanations 

set forth in their majority opinion, we would regard that as a matter warranting further inquiry. 

The third point I’ll make is that weaknesses in FSOC’s SIFI designation decisions to date give further reason to question whether 

the rationale in those decisions is a full account of what drove 

FSOC’s decisionmaking. One such weakness is FSOC’s insistence 

on a company-specific designation process for insurance companies 

even as it considers an activities-based approach for other entities. 

In explaining in its MetLife decision why it was not taking an 

activities-based approach, FSOC used circular reasoning. It said 

that Dodd-Frank required it to consider specific statutory criteria 

when making a company-based designation and ‘‘an activitiesbased analysis is not one of the statutory considerations.’’

In other words, FSOC said that it was not considering an activities-based approach because it had not considered taking an activities-based approach. One is left to wonder again about the degree 

to which FSOC’s designation of three specific companies designated 

by FSB resulted from that prior FSB action. 

Mr. Chairman, the legislation you have introduced would address 

some of the concerns that I have raised today. Section 403 would 

provide visibility into FSB-type processes, including the positions 

taken by U.S. regulators on policies they may be called upon to address back home. 

Section 302 addresses the uncertainty companies face about how 

to avoid being considered systemic. Under the bill, a company could 

submit a plan to FSOC for changing its corporate structure and operations so the company would not be deemed systemically important. If FSOC believed that plan was insufficient, it would have to 

explain why and what actions the company could take to avoid 

SIFI regulation. That change, like Section 403, would increase 

transparency, fairness, and thereby the quality of Government decisionmaking. 

Thank you for this opportunity, and I look forward to any questions that you may have. 

Chairman SHELBY. Thank you. 

Dr. Posen. 

STATEMENT OF ADAM S. POSEN, PRESIDENT, PETERSON 

INSTITUTE FOR INTERNATIONAL ECONOMICS 

Mr. POSEN. Thank you, Mr. Chairman and Ranking Member 

Brown, for this opportunity. 

Let us begin sort of as Senator Brown did, to remember that 

international coordination and regulation remains in the U.S. interest. It remains in the U.S. interest because the rest of the 

world’s banks and financial entities exist whether or not we want 

them to or not. And the spillovers of them screwing up are much 

bigger and much faster today than they have ever been. There is 

no simple defense against that. I realize no Members of the ComVerDate 0ct 09 2002 11:57 Dec 20, 2016 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 L:\HE3E8B~1\07-08T~1.REG\HEARING\97398.TXT SHERYL

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mittee are challenging that, but let us start there because that is 

where the FSB comes from. 

It is also worth remembering that the FSB, like every other 

international financial institution since the war, is largely the child 

of success of American administrations, Democrat and Republican. 

When we think of the Financial Stability Forum, that was founded 

16 years ago through U.S. efforts. The graduation of it to the FSB 

was, again, through U.S. efforts, through the U.S. Government, 

and it remains the fact that the United States is the dominant 

voice in this effort. 

This is, in fact, because of our technological experience, our technical expertise, the depth of our markets, the fact that we still remain a model, and we have overweight influence in the FSB. Most 

of the complaints about the FSB abroad are because the United 

States is seen as having too much power, not too little. I think it 

is important to have that baseline as we go forward. We cannot 

simply live with the institutions and the misbehaviors of other 

countries’ financial institutions. 

So, therefore, what is it we want and what is it we get out of 

international regulation? We want to raise minimum standards, we 

want to increase cross-border transparency, and, most importantly, 

we want to prevent regulatory arbitrage. We want to prevent, 

whether it is U.S.-based entities or foreign entities, getting around 

the legislated regulations from Congress and from Congress’ appointees by going to other jurisdictions and inflicting damage on 

the United States. The FSB is actually making a major contribution to diminishing this—not getting rid of it, but certainly diminishing it. 

There are instances where the FSB is messing up, and I will indicate that I actually share some views with some of the other witnesses on the insurance industry where I think the FSB does have 

it wrong. But these are instances of where they are getting a specific decision wrong, not something inherent to the process or inherent to the relationship between the FSB and the FSOC or the 

U.S. Government. 

Now, why is the FSB useful? There has been a lot of talk about 

the fact that it is opaque, it is not accountable. However, I think 

it is important to recognize several attributes that are positive. The 

first is it involves all of the major countries that have major financial centers and all of the minor countries that have major financial 

centers, which is a body that we need if we are going to plug these 

holes. 

It also, for that matter, is small enough that it can make decisions, which is a key attribute. As we know from, say, the IMF or 

the WTO, when every member gets a vote, it deadlocks, you get 

nothing. 

It is cutting across regulatory and turf barriers, perhaps not always in a way the other witnesses would like, but it importantly 

gets us out of this cognitive capture that both United States and 

other regulators can get when they are only in their own silo. 

It is coordinated directly with the G–20 economic leaders’ meetings and processes, which means there have to be transparent 

progress reports, there have to be public accountings, and things 

that reach the G–20 level can be brought to the public for buy-in. 


BANKI-41578DSA with DISTILLER
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By including central banks and finance officials, you are not only 

getting the right experts in the room; you are getting it past the 

narrow bank supervisors, which is an important quality. 

And, finally, I would argue that, in addition to the bipartisan 

U.S. legacy, it has rightly a soft-law legacy. They are not legislating for us. They are setting standards that we and others might 

adhere to, and if they are good standards, there will be market and 

peer pressure and public pressure to adhere to them by others. All 

the FSB can do is name and shame. It cannot enforce anything. 

Now, I think we can get some specific areas where the FSB has 

done great work. People who believe in resolution as a key cause 

of the financial crisis can see huge progress there, certainly bank 

capital standards, certainly liquidity standards. These are important aspects. 

I do believe the FSB is wrong about insurance companies because of a general problem in the FSB, but also a general problem 

in the FSOC. We do not have a coherent U.S. representative of expertise on insurance companies at that level. Therefore, the European Commission, which has a pre-made, pre-baked Solvency II, 

gets to shove that through, and their companies who are going to 

be stuck with it want to be sure that their competing foreign companies also get stuck with it. That is not a good reason for a law, 

and if the U.S. representatives of the insurance companies were 

better equipped and had better arguments at FSB, we could prevent Solvency II from causing harm. Solvency II harm is not because it engages in prudential risk regulations, as Mr. Wallison 

said; it is because they interfere with long-term capital in ways 

that are not efficient for insurance companies by making them act 

like banks. That is a mistake. But it is an intellectual mistake of 

the FSB that the FSOC and U.S. representatives have the power 

to correct. It is not an inherent problem of the FSB. 

Thank you for this opportunity. 

Chairman SHELBY. Thank you, Dr. Posen. 

A lot of concerns have been raised in testimony today and at previous hearings we have held here about the role of the FSB and 

its regulatory influence in the United States. As I have mentioned, 

the FSB is neither a U.S. regulatory body nor is it accountable to 

Congress and the American people. 

Could each of you succinctly elaborate, if you can do that, on 

your top concerns with the work, the transparency, and accountability of the flexibility and what Congress can do to address some 

of these concerns? Governor, we will start with you. 

Mr. KEMPTHORNE. Mr. Chairman, thank you very much. In visiting with different members of the FSB, in one instance where it 

was a central bank president of another country, but he made the 

point—he said one of the things that we should do is give much 

greater exposure to the insurance industry because we do not know 

much about it. We have had other members of FSB say it is interesting at times to see what the International Association of Insurance Supervisors say they must do in the name of FSB, and that 

somebody should press them on that. There are a variety of things. 

And then, Mr. Chairman, as mentioned earlier, the close connection between FSB actions and FSOC actions, where within days 

AIG is named as a G–SII, the three that are now designated as 


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SIFIs were all named as G–SIIs first by the FSB. Why did they not 

coordinate? Why did they not say to those that have the expertise 

in this country, ‘‘Where do you think there may be a problem?’’ And 

that is why, again, Mr. Chairman, we ask that the activities-based 

approach should be taken. That has not occurred. There is no 

transparency. The FSB does not communicate to the companies 

why they made the decision they did. We would like greater transparency. 

Chairman SHELBY. Mr. Wallison, succinctly. 

Mr. WALLISON. I will try. 

Chairman SHELBY. I know, I know. Thank you. 

Mr. WALLISON. My concern, as I expressed in my oral testimony, 

is that the FSB is intending to regulate shadow banks and the 

shadow banking system. I think that would be a major mistake, 

and if that idea is brought into the United States, it would substantially weaken our financial system. 

I would like to see a lot more transparency and accountability at 

the FSB so that we understand why they are trying to regulate 

shadow banks, other than the fact that banking regulators in general are trying to get control of everything that is not a bank. But, 

of course, we are not getting that. To the extent we can, that would 

be helpful. But the most important thing I think we have to worry 

about is the idea that our capital markets will ultimately be put 

under prudential regulation by an organization like the Fed. 

Chairman SHELBY. Mr. Stevens. 

Mr. STEVENS. Mr. Chairman, there are any number of issues. 

One, for example, is that the full record of comments that the FSB 

receives is not made public, so you do not really have an idea of 

who or what may be influencing its decisions. 

Second, it does not appear that the FSB feels obliged as a U.S. 

regulatory agency would actually to take into consideration and respond to the commentary it receives. This pack of papers in front 

of me represents just what the ICI has put in front of the FSB. 

Much of it has been, frankly, disregarded. We have no idea what 

the positions are that the U.S. representatives are taking, but 

when recommendations emanate from the FSB, it is clear they 

have been front-run in terms of the FSOC process, and certain decisions have already been made, which are then revisited here in 

Washington. It is sort of like being both the pitcher and the umpire 

in a baseball game. 

Chairman SHELBY. Mr. Scalia. 

Mr. SCALIA. Transparency certainly, you have heard. Transparency also into the influence that might exist, FSB upon the 

FSOC, which has not been provided and should be avoided in the 

future. 

Second, a balance. Dr. Posen’s point about insurance representation is a very important one, I think. 

And, third, FSB should hesitate and think long and hard before 

making company-specific decisions. That implicates principles of 

due process, the opportunity to be heard and the like, that really 

change the nature of what it is doing. 

Chairman SHELBY. Dr. Posen. 

Mr. POSEN. Thank you. I am much more concerned about the 

substance than the process. I think the substance has gotten too 


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bank-captured, too bank-controlled, too much bank supervisor 

mind-set, as my colleagues and I have discussed. I think they remain a little too timid on surveillance, and they need to extend 

what needs to get the Chinese banks, which, of course, are in the 

news right now, which are becoming major systemic actors. We 

need to be willing to open up the governance enough because we 

need to get them in and get them observed. 

And I sort of echo Mr. Scalia’s point. I think there has been too 

much time wasted and too much distraction on individual designations, and that is a fight we cannot have. But at the same time, 

if the FSOC and the FSB come up with completely different designations, that is a recipe for regulatory arbitrage because national 

champions will cheat around our rules. 

Chairman SHELBY. Thank you. 

Governor Kempthorne, could you briefly describe the key differences between the U.S. and European regulation of insurance? 

And given those differences, is it appropriate for the FSB to influence insurance regulations in the United States? 

Mr. KEMPTHORNE. Mr. Chairman, it is a totally different system 

that is used in the European Union than in the United States. I 

have stated in international forums that the idea of Solvency II, it 

may work for Europe. It will never, ever work here in the United 

States. We are State-regulated, and as Secretary Geithner said 

after the 2008 crisis, the insurance industry came through it ‘‘quite 

well.’’ So we have a program that has worked for decades. 

Chairman SHELBY. Even AIG did not get in trouble on insurance. 

They got in trouble doing something that they probably wish they 

had never known about. 

Mr. KEMPTHORNE. Mr. Chairman, you are absolutely correct. It 

had nothing to do with their insurance element within AIG. 

Chairman SHELBY. Thank you. 

Dr. Posen, in your testimony you highlighted several troubling 

FSB outcomes. For example, you noted that calling all nonbank financial companies ‘‘shadow banks’’ and regulating them as banks 

endangers the very financial diversity that enabled the United 

States to recover from the financial crisis better and more quickly 

than our global counterparts. 

You also noted, and I will quote you, ‘‘We do not want any global 

regulatory process to interfere with this diversity in U.S. finance.’’

What are your concerns with the FSB potentially interfering 

with the U.S. financial system’s strength and diversity? 

Mr. POSEN. My concerns are more theoretical, to be honest, than 

practical at the moment. I do not think the FSB is a direct threat. 

I do think that it is important that the U.S. regulators and your 

representatives make it clear that it is a good thing to have capital 

markets as well as banks. It is a good thing to have lively risk taking as well as lending. It is a good thing to have nonconcentrated 

banking systems. And it is entirely possible and consistent with 

part of the FSB process to make that the agenda. 

I do not think there is a need for absolute convergence. The example I chose to give of the insurance companies is the one place 

where I do feel there is a costly effort being under way from the 

FSB. I do not think this is motivated so much because the leadership of the FSB wants convergence, although some people do. I 


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think it is motivated by an excessive—some people have mentioned 

rush to judgment. The FSB is trying very hard to wrap up what 

it considers its post-crisis duties very quickly, and I think it is trying to force everything with off-the-shelf solutions because it is 

rushing too much. 

Chairman SHELBY. The last question will be directed to Mr. 

Scalia. As an administrative law practitioner, among others, you 

are familiar with our domestic rulemaking process. For example, 

the Administrative Procedures Act governs the way, as I understand it, in which Federal and administrative agencies may propose and establish regulations in the United States. But none of 

those processes apply to the FSB. In fact, according to the FSB, 

‘‘The organization operates by moral suasion and peer pressure to 

set international standards.’’

Mr. Scalia, in your opinion, would FSB’s reactions and decisions 

pass legal muster in the United States? And what are your main 

concerns with the role and impact of the FSB on our regulatory 

process? 

Mr. SCALIA. Mr. Chairman, no, the FSB processes would not pass 

legal muster in the United States. One principle that is absent is 

that of notice, of providing notice to the public in advance of what 

might be coming down the pike. 

Now, that furthers interests of fairness, but I think more importantly it leads to better decisionmaking, because when the public 

has notice, it has an opportunity to weigh in, provide guidance, and 

regulators benefit from those insights. So I think that is one important difference. 

A second I will mention is the opportunity to be heard and appear and defend your rights and interests. And I think when FSB 

finds itself making company-specific designations, the absence of 

that is striking as a matter of the perspective of U.S. law, or really 

I think any perspective. 

A third difference that I will mention—and then I will stop in the 

interest of time, although I could go on—is an opportunity to appeal. You know, in the United States, when there is regulatory——

Chairman SHELBY. Basic due process. 

Mr. SCALIA. Basic due process, being able to go to court and say, 

respectfully, we believe this was a mistake, you erred. And that 

also is absent from the FSB process. 

Chairman SHELBY. Thank you. 

Senator Brown, you have been very patient. Thank you. 

Senator BROWN. Thank you, Mr. Chairman, as you always are, 

so thank you for that. 

These hearings are especially important, and I am appreciative 

that we have them so that we do not forget the cost of the financial 

crisis. I live in a Zip code in Cleveland, Ohio, 44105, which had 

more foreclosures in 2007 than any Zip code in America. I still see 

the cost in that neighborhood, and neighborhoods all over my State, 

as I think is true in so many places. I think these hearings force 

us to remember, and should, what Dodd-Frank and what the consumer protections did for our financial system and for consumers 

and for people that work and use the financial system. And I think 

it helps—these hearings help us recognize how much more we still 

have to do. 


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Let me start with you, Dr. Posen. You mentioned cognitive capture today. I remember some maybe 3 years ago, I was on a panel 

with Governor Huntsman and at that point just former head of the 

FDIC, Sheila Bair, and I believe you were moderating it, and you 

used that term at the Peterson Institute 1 day of ‘‘cognitive capture,’’ where regulators begin to hold the same world view as the 

companies which they oversee. 

It seems that one of the benefits of a single body with broad 

international membership and different agencies is that you can 

avoid a single nation or regulator protecting one of its companies 

or industries by avoiding regulation. 

My question is this: Dr. Posen, we know inconsistent regulatory 

standards create the potential for substantial risk. Would you discuss the importance of coordinating standards to address regulatory arbitrage and other systemic risks, please? 

Mr. POSEN. Thank you very much, Senator Brown. You have already hit the issue in your question, so let me try to document the 

issues you raise. 

What I think has to be looked at when we look back at the financial crisis in the United States and the other major Western economies in recent years was that everyone was pulling in the same direction. Banks, their lobbyists, Congress people, Fed officials, 

Treasury officials, both parties—they were all largely on the same 

line that less regulation, infinitely less regulation was better, selfregulation was better. And as a result, when we look for a cause 

of the crisis, there is a clear failure of behavior, of regulation, of 

supervision, but it is so dispersed. It was not one person’s decision, 

nor was it one person’s bribe. It was, as I put it, cognitive capture, 

that everyone bought into this being the way of the world. 

And the FSB has been successful in breaking that down, not just 

because it has a mandate to look at regulations, a mandate to improve regulations, but because it is, as you say, cross-border. 

We had a world in which AIG financial products, as mentioned, 

got away with doing something that an insurance company or, for 

that matter, no one ever should have done, because it took place 

in London instead of New York and because it took place in a subsidiary that was supposedly not part of the insurance, and so, 

therefore, it had a loophole to get to. And we all know the repercussions of that. 

We had bad lending on mortgages, be it in Spain, be it in the 

United Kingdom, and certainly here in the United States. And that 

was not because of Fannie and Freddie. As former Fed Governor 

Randall Kroszner has pointed out, it was because of bad standards 

in the banking system, bad enforcement of standards in the banking system. And that allowed other countries to get their mortgages 

paid for, distributed, and the standards to be lower throughout the 

world. 

So how do we stop this? We make our best efforts. We make our 

best efforts to come up with best practice; we make our best efforts 

to challenge assumptions; we make our best efforts particularly to 

assure that no one country, be it France, be it Japan, or even the 

United States, gets to say, ‘‘The interests of my banking system, as 

companies not as a public interest, trump the need for decent regulation.’’ And the FSB has been pursuing that goal at least. 


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We have had various aspects where in the past, as created the 

euro crisis, French banks and German banks were bailed out at the 

public’s expense, leaving Greece with the bill. This is the kind of 

thing that the FSB is meant to avoid by breaking down these barriers and subjecting these kinds of bad behaviors to global scrutiny 

and raising these bad behaviors. I agree, activity-based not so 

much institution-based, up to the G–20 level where they can be 

properly addressed as well. 

I will finally say that the—this is where I differ on the due process point. I think it is important that international regulations be 

done by sovereign nations agreeing and creating standards that are 

soft power, that when countries or companies do not comply, it is 

up to the market and the public to punish them; it is not some supranational agency to do it. And I think the FSB is making huge 

strides and getting more plugging of holes of the AIG financial 

products kind because it involves this voluntary shaming and voluntary invoking of the market rather than legislating. 

Senator BROWN. Dr. Posen, speak to the designation process in 

terms of interconnectedness related to securities lending and derivatives, the risk of runs, the potential for fire sales, if you will. 

Mr. POSEN. Yes. Obviously, the question of how to handle the 

asset management industry is a crucial factor here, mutual funds 

and other asset managers. So much of our private savings, so much 

of our people’s pensions and long-term savings are there, for understandable reasons. 

But as we saw with the money market mutual funds during the 

crisis, they were able to act as though they had an implicit Government guarantee and then eventually an explicit Government guarantee, because no one wanted to see them break the buck, and because it was so politically unpopular to see them not have deposit 

insurance like the banking system, even though inherently they 

are much more short term than the banking system. 

Paul Volcker, who is hardly a radical, has bemoaned this fact at 

great length before this Committee, I believe. 

This is just one example of how it is correct and right for the ICI 

and others to go out there and say you cannot treat mutual funds 

and asset managers like banks. They are not the same as banks. 

You have to judge the regulation appropriately. But it is not an argument that there should be no regulation or that we have sufficient regulation at this point. 

We have seen repeatedly that asset managers may not themselves cause leverage, which is a good thing and should get them 

some points. But we have also seen that fire sales can and do 

occur. We saw this with the European crisis in the past in which 

we have seen the sell-off of European bonds, which then led to 

losses in the U.S. system, which also exacerbated the European financial crisis in 2010–11. 

Fire sales, we may not have the right answer. Circuit breakers 

are not necessarily a perfect thing, as we have seen with the U.S. 

stock market. We have to think hard about how to do it, and we 

do not need to rush to regulate it in the next 5 minutes. There 

clearly is a gap in regulation in this area. 

Mr. STEVENS. Senator, since this is now touching on——


BANKI-41578DSA with DISTILLER
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Senator BROWN. Thirty seconds, because my time has run out, 

and I want to ask Mr. Kempthorne—but, Mr. Stevens? 

Mr. STEVENS. The ICI has insisted all along that there be an evidence-based analysis of things like fire sales. The documentation 

we have in front of the FSB is very clear. In the 75-year history 

of U.S. stock and bond funds, there has never been the kind of fire 

sale or panicky sell-off that Dr. Posen is describing. It is hypothetical. It is a matter of conjecture. It is not a matter of historical 

experience or empirically demonstrated. And the money market 

fund example, which central bankers go back to all the time, has 

already been addressed in two successive rulemakings by the SEC. 

It is important to note the FSB’s focus here is not money market 

funds; it is ordinary stock and bond funds. And so the issue is, I 

think, a false scent to raise the experience of money market funds 

in the crisis, because FSB’s focus is elsewhere. 

Senator BROWN. Governor Kempthorne, let me shift to something 

else. A number of my colleagues and I worked to pass and sign into 

law clarifications of insurance capital standards. You mentioned 

that a moment ago. Would you update us on your talks with the 

Fed to implement them? 

Mr. KEMPTHORNE. Yes. Senator Brown, thanks very much. It was 

critical for the solution that Congress came up with. The Fed acknowledged that. They said, ‘‘Absent that, we were not able to differentiate the business models between banks and insurance.’’

Since then, we have a group of companies that are under the 

banner of ACLI that leadership has met with Fed officials. They 

now have put in place what will be a series of just working sessions. We appreciate the fact that the Fed is saying while we have 

been for decades dealing with banks, this is a new area for us, and 

so they have asked the industry to please have the dialogue so that 

they can understand some of the nuances and some of the elements 

with regard to the insurance industry. 

We certainly as an industry cannot predict the outcome of what 

the Fed would recommend, but at least we appreciate this dialogue 

that is taking place. 

Senator BROWN. Thank you. 

Thanks, Mr. Chairman. 

Chairman SHELBY. Senator Heller. 

Senator HELLER. Mr. Chairman, thank you, and thanks to the 

witnesses for being here today. It is a good group, and I appreciate 

your knowledge on these issues. 

I want to echo what has been said. It is no doubt that regulators 

are looking at risks associated with activities—should be looking at 

risks associated with activities and not just the size of an institution. One of the frustrations is, instead of working to decrease systemic risk, it seems regulators just want to make more SIFI designations. I think most of the panel would agree with that. 

I think some of the best solutions, Mr. Chairman, is what you 

put together in your bill and what this Committee passed recently. 

I think the legislation does a great job in the nonbank SIFI designation process, and I would like to hear from the Governor and 

Mr. Stevens their thoughts on the Chairman’s bill, specifically Title 

III and the reforms of FSOC’s designation process. 


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Mr. KEMPTHORNE. Yes, Senator Heller, thank you very much, 

Mr. Chairman. We greatly appreciate the efforts of the Chairman 

and Members of the Committee. Specifically, one of the elements 

that we think is absolutely critical is the off ramp for a SIFI, because I do not think any of the companies can tell you what were 

the elements that put them into a SIFI designation. So perhaps by 

having an off ramp, it will give us those elements now so that a 

company knows how it can get off. It may help other companies 

from ever getting on. 

Also, I would just note that with regard to a lawsuit that has 

been referenced in this hearing, again, we think that will bring additional light to what were the elements that were utilized in actually putting a company in that situation. 

It can put an adverse competitive problem to those that may be 

designated SIFIs. One element may be additional capital requirements, different regulations that may put them at a disadvantage 

in a competitive marketplace. We need to have a highly competitive 

marketplace and not disadvantaged some of those elements. 

I would also say, Senator Heller, as I indicated in my opening 

comments, to you and Senator Tester, we greatly appreciate language, which you have included, that would help bring about much 

greater transparency, the idea that it would require that those entities in the United States, which have been termed ‘‘Team USA,’’ 

would on an annual basis have to submit a report to this Committee and would have to come to a hearing so that the Members 

of the Committee can ask them, ‘‘What is taking place at FSB, at 

FSOC?’’ I think that is a tremendous benefit, and I compliment 

you. 

Senator HELLER. Is this your view or ACLI’s view? 

Mr. KEMPTHORNE. I will tell you, Senator, that this is a view that 

I have heard repeatedly by industry. We need much greater transparency, and this would help accomplish that. 

Senator HELLER. Mr. Stevens? 

Mr. STEVENS. Senator, thank you for your question. The purpose 

of addressing potential systemic risk is not simply to identify it and 

admire it. Presumably it is to deal with it. And so common-sense 

provisions like those that are in the Chairman’s bill that would, 

prior to designation, allow either a primary regulator or a firm to 

address and mitigate or eliminate the risks seems to me to be an 

improvement on the mechanisms in Dodd-Frank, and a sensible 

one as well. 

I think that it would require the FSOC to be specific about what 

risks it thinks exist, but if the FSOC cannot be specific and cannot 

articulate what they are, they probably should not be designating 

in the first place. 

So it seems to me that the provisions in Title III of the bill in 

that respect make eminently good sense and are consistent with 

the broad objectives of the statute. 

Senator HELLER. Let me ask you a follow-up question. If some 

of these asset managers are labeled SIFI designations, who bears 

the cost of these increased regulations? 

Mr. STEVENS. Well, you have to be mindful of what that entails 

under Dodd-Frank. There is a mandatory 8 percent capital requirement. There are various fees and assessments. There would be putVerDate 0ct 09 2002 11:57 Dec 20, 2016 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 L:\HE3E8B~1\07-08T~1.REG\HEARING\97398.TXT SHERYL

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ting the fund into a bailout pool for large banks or other SIFIs that 

may fail in order to make sure the taxpayer is not on the hook. It 

is just another way of putting some of our taxpayers on the hook. 

And then, finally, it would subject them to enhanced prudential 

supervision, which essentially is the Fed coming in and telling the 

portfolio manager potentially how to run the fund. I think that a 

fund so designated is not going to be too big to fail. It is going to 

be too burdened to succeed because there are lots of alternative 

funds in the competitive marketplace for mutual funds in the 

United States, and many investors, being sensitive to costs, will 

simply say, ‘‘Well, I will not invest in that fund. I will take my 

money somewhere else where I am not paying these kinds of penalties.’’

Senator HELLER. So what you are saying is ultimately there will 

be cuts in their returns on their investments. 

Mr. STEVENS. It will be paid by millions of Americans who are 

seeking to save for retirement. 

Senator HELLER. OK. Mr. Chairman, thank you. 

Chairman SHELBY. Senator Menendez. 

Senator MENENDEZ. Well, thank you, Mr. Chairman. 

International coordination to address systemic risk is not easy, 

but as we learned during the financial crisis, I think it is critically 

important. As we saw with companies such as Lehman Brothers 

and AIG, systemic risk can easily cross national borders, and a 

company large enough to create systemic risk will most certainly 

have activities affecting or occurring in multiple countries. 

We also saw the need for harmonization; otherwise, risk can just 

flow to the darkest and least regulated corner of the system, where 

it can build unchecked beyond the reach of countries whose citizens 

could bear significant costs if things go wrong. 

Now, the Wall Street Reform Act made important reforms to address systemic risk here at home, and internationally, the United 

States and other countries have established forums such as the Financial Stability Board to improve coordination and close gaps 

across jurisdictional lines. 

Now, I understand that some companies have legitimate concerns about whether and how particular measures might be applied 

to them. And it is important that we distinguish these substantive 

concerns from procedural ones so that we are able to make appropriate improvements on both fronts. But if you are concerned about 

a SIFI designation, it would be overkill to destroy the entire process for designating anyone else as systemically important, too. 

So as always, from my perspective, in the 23 years that I have 

spent in the Congress, it is about getting the balance right at the 

end of the day. 

So I think individual cases may be able to illuminate ways that 

both the domestic and international processes can be improved, as 

we have already seen in some of the changes the Financial Stability Oversight Council has made to strengthen its review process. 

So with that focus in mind, I have a few questions for our witnesses. 

Dr. Posen, many have raised concerns about the sequencing of 

actions by U.S. authorities and international bodies such as the 

FSB, and this really gets at the heart of the challenges we face in 


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terms of coordination with other major markets. So to me, it is important that concerns about sequencing be dealt with, but not be 

used as an excuse for inaction or obstruction. There are real questions about how to keep the domestic and international tracks moving together at the same pace. 

So why do you think international bodies such as the FSB have 

chosen to move ahead of individual countries’ authorities in certain 

areas, whether SIFI designation or articulating a framework or 

principles for something like capital standards? What are the benefits of doing that? 

Mr. POSEN. Thank you, Senator, and as you rightly said in your 

remarks, it is a question of balancing risks. The idea is that the 

United States has to be engaged with the international process not 

so much because of defending the United States from overregulation, but defending us from underregulation and poor performance 

abroad. And there has to be some willingness to tradeoff not the 

U.S. sovereignty and not the U.S. oversight, but occasionally officials want to be able to say I am much more at risk of something 

terrible going wrong, as you say, in the dark corner of some country that is eluding the safety net, eluding the regulators, than I am 

about the X pennies cost of slight overregulation in the United 

States. And that is a legitimate kind of tradeoff to make. 

And so in the real world, just as the case in Congress, as we saw 

with the TPA vote last week, the Senate and the House are not always perfectly sequenced. What matters is that in the end they 

come to an agreement. Nothing terrible is going to happen with 

them being out of sequence for a short while. What matters is the 

debate and the eventual convergence and compromise. 

Similarly, the FSB in part because it is more closed, in part, 

however, because, as I said to Senator Brown, they are also less 

subject to any individual country or interest group’s lobbying, is 

able to make decisions faster. It does not mean they are right. It 

does not mean they should always do them at maximum speed. But 

in the case of the SIFI designations, for example, I think it was an 

important decision that was made about the balance of risks, that 

leaving the uncertainty about who was going to be a SIFI, at least 

as far as the FSB was concerned, had unfair costs to those private 

sector entities and had costs to the regulatory process. And so, 

therefore, it made sense for them to go forward, and if it turns out 

that the FSOC or other national regulators were to push back, 

those are, as you said, individual cases that could be corrected. 

The process, the fact that this appearance of timing is not the 

subject of a conspiracy or even of undue pressure on the FSOC, it 

is just we are iterating to the right goal. 

Senator MENENDEZ. Thank you. One last question. I think the 

sequencing in the Congress would go better if the House of Representatives would understand the enlightened process of the Senate. But, Mr. Stevens, let me ask you, how do you feel the feedback 

you have given at the domestic level, in terms of how different 

metrics might apply differently in the asset management context 

than they would to other kinds of financial market participants, is 

carrying through the international level? And to the extent that 

you have the concerns you have expressed about whether actions 

at the international level might reduce opportunities for a full and 


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well-informed process here in the United States, what are some of 

the top recommendations that you would make to improve the process without effectively killing it overall? 

Mr. STEVENS. Thank you, Senator. As I elaborate in my written 

statement, I do think there is a cognitive capture at FSB, and it 

is because virtually all of its members and all of its leadership consists of central banks. If its mandate is to look at the financial system in its totality, it needs to be reconstituted, in our judgment. 

It should not simply be bankers with their point of view trying to 

impose bank-type regulatory models on everyone. The capital markets regulators and securities regulators ought to sit as co-equals 

at the table when you are talking about areas like asset management. Insurance regulators ought to be there as co-equals at the 

table when you are talking about insurance. That would be a 

meaningful form of international collaboration and international 

exchange, and I think it would solve many of the problems. 

We have an example now of IOSCO basically saying that it 

thinks that the FSB is headed in a completely wrong direction with 

respect to asset management, putting the cart before the horse, trying to find what the solution is before it has even identified the 

problem. And so IOSCO has said let us look at activities and products straight across the asset management sector instead of, as the 

FSB’s process essentially is doing, picking a handful of large U.S. 

mutual funds and U.S. advisers and recommending them for designation as SIFIs. 

So I think the fundamental reform of the FSB is to reconstitute 

it in a significant way and break up the club of central bankers 

who have only one view of the world. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Kirk. 

Senator KIRK. For Mr. Scalia, I would ask you a question about—

what would you think of applying notice and comment provisions 

of the U.S. Administrative Procedures Act to the FSB deliberative 

process so that U.S. insurers could have notice and time to comment on potential actions? I have been very worried over time that 

the process of providing insurance to millions of Americans is different than banking in international circles, that if we provide the 

wrong standards, we could make insurance products much more 

expensive and less available to Americans. 

Mr. SCALIA. Thank you, Senator. I think it would be a valuable 

improvement for there to be advanced notice and opportunity for 

public comment, and also consultation, which are some features 

that I believe the Chairman’s bill would achieve before the FSB 

takes action. 

As I mentioned, notice is in part simply about fairness, giving 

people a heads up and a chance to speak up, assert their rights and 

interests. But it is also about reaching better decisions through information, consultation and the like. So those benefits would certainly exist. 

Dr. Posen has drawn the analogy to the House and Senate, and 

I am sure all of us could identify respects in which we think the 

House and Senate could do their jobs even better than they do. But 

one very important thing they do have going for them is the openVerDate 0ct 09 2002 11:57 Dec 20, 2016 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 L:\HE3E8B~1\07-08T~1.REG\HEARING\97398.TXT SHERYL

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ness of the debate that occurs and the like, and we do not have 

that in connection with the FSB. 

Dr. Posen also referred to the House and Senate coming to agreement, which is what they do. It is also what the FSB does. And, 

yes, it purports to act through moral suasion, but there certainly 

appears to have been an influence exerted on the FSOC process as 

a result of the FSB designations. At least it is something worth examining as the Committee is seeking to do today. 

Finally, with respect to your comments, Senator Kirk, about insurance and the FSB, there seems to be perhaps consensus among 

members of the panel that the FSB would benefit from representation of a broader set of expertises and that one area of expertise 

that is underrepresented currently is insurance, and it may well be 

that had that insurance expertise been present in 2013, the designation decisions that were made might have been approached differently. 

Senator KIRK. Thank you. Mr. Chairman, I will be considering 

legislation to provide notice and comment provisions with regard to 

insurance matters in the FSB. I think that would—as one commentator said, the FSB was as clear as mud. To provide the notice and 

comment provisions, to provide much more transparency, would 

calm people’s irrational fears. 

Chairman SHELBY. Thank you, Senator Kirk. 

Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. It is good to be sitting beside you. 

Because our financial institutions can transfer assets around the 

globe in the blink of an eye, they can effectively choose which country regulates many of their riskiest transactions. That means that 

regulators around the world must be vigilant and must coordinate 

their efforts in overseeing the world’s largest financial institutions. 

The Financial Stability Board is the main forum for that kind of 

coordination, which makes its work critical in preventing another 

financial crisis. 

Now, while the FSB is not legally binding on the United States, 

its decisions are not, those decisions can certainly influence our domestic policies, and that is why it is important that the FSB have 

the same kind of transparent, data-driven decisionmaking that we 

ask of our own regulators. 

For example, here in the United States, a company may be designated by FSOC as systemically important, but the designation 

can be reversed if the company restructures its operations so that 

it creates less risk. That means there are now two ways to manage 

risks posed by a big bank—the bank can change its business model 

to produce less risk or it can face the stricter regulations and greater oversight. The bank decides which is less costly, and the result 

we get is what we want, and that is, less risk. 

Now, Governor Kempthorne, as you have noted, many of your 

members have been designated systemically important by the 

international FSB. Are you aware of any process that the FSB has 

for allowing those companies to reverse their designation by changing their business activities? 

Mr. KEMPTHORNE. Senator Warren, thanks for the question. I am 

not aware of any FSB off ramp to get the G–SIIs out of there. It 


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would have been extremely helpful if they would have announced 

what were the elements that caused them to be name G–SIIs in 

the first place, and also, was there an opportunity to correct that, 

as you are alluding to, before they were designated? 

Senator WARREN. OK. So let me just break this down. So the answer to the question—Was there any process for reversing the designation?—you are not aware of any process for reversing it. I do 

want to talk about whether or not companies were informed about 

what the criteria would be. Does the FSB provide designated companies with the information they need to understand why they 

were designate and how they could potentially change their business activities to pose less risk? 

Mr. KEMPTHORNE. Senator Warren, based on the input I have received from those companies, the answer is no. 

Senator WARREN. All right. Would you support changing the FSB 

process so that designated companies would have a chance to 

change their operations and possibly reverse their designation? 

Mr. KEMPTHORNE. Senator, yes, because we must have greater 

transparency; we must have greater communication. And, again, 

before a designation, why not identify what is the risk and then a 

company may determine it could take its own actions to remove the 

risk, or it could change its operation, or you could ask the primary 

regulators: Would you please deal with this issue? 

Senator WARREN. Mr. Stevens, would you agree with that? 

Would you support such a proposal? 

Mr. STEVENS. I am trying to puzzle out, Senator, how it would 

actually work in the methodologies that have been proposed with 

respect to mutual funds. The methodology basically is based solely 

on size. What the FSB has proposed is if you are a mutual fund 

with $100 billion in assets under management, you will be automatically within a materiality threshold recommended for consideration. 

So to change the business model, I suppose, you would either 

have to split the fund in half—and now the manager has got two 

$50 billion mutual funds. Maybe that makes it less risky. I think 

what it does is says that the original materiality threshold is nonsensical. 

Senator WARREN. So I take it, though, Mr. Stevens, what you are 

concerned about is you believe—although I am not sure if it is posted, but you believe that in an area—there is an area where FSB 

says size is all that is ever going to matter to us, we do not care 

what your practices are? But I take it there are also many that are 

pulled into designation because of their specific business practices, 

some combination of the risks they present, because of size, and because of the activities they engage in. This is what I understand 

Governor Kempthorne to be talking about, that there is no information right now about what it is that causes this designation and 

no off ramp for the companies that are willing to adjust. 

So my question is: Does it make sense to at least ask the FSB 

for more clarity around what it is that causes someone to be so designated and to provide off ramps if there are multiple factors that 

are involved? 

Mr. STEVENS. I certainly would never argue against more clarity. 

In fact——


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Senator WARREN. Good. 

Mr. STEVENS.——we have even asked for them to justify the materiality thresholds that they have put into their methodologies, 

and, Senator, they are nothing more than just numbers picked out 

of the air. 

Senator WARREN. Mr. Scalia. 

Mr. SCALIA. Thank you, Senator. I think it is a very important 

question you have asked. One other point that I would make is 

that if FSB were to make that change, it is not clear at this time 

what difference that would make for companies that have already 

been designated by FSOC, because it is FSOC that has designated 

them and the Fed that will regulate them. 

What we are told is that FSOC is not influenced by FSB decisions. But an FSB un-designation would only matter to an FSOCdesignated company if, lo and behold, FSOC were influenced by 

FSB. 

So I think it is a very important question, but it is only getting 

at one part of the problem the companies face. 

Senator WARREN. I appreciate that point, although at least we 

have within FSOC—we have had the testimony here that there are 

off ramps, there are possibilities for coming out from underneath 

an FSOC designation. And so what we are looking for is can we 

get the same kind of thing over at FSB. And I take it you would 

support that sort of change in the approach that FSB uses. 

Mr. SCALIA. Yes. I think it would be a valuable step forward if 

FSB considered the sort of changes that the Chairman’s bill would 

make in the FSOC process. 

Senator WARREN. Well, so this is—Governor Kempthorne, I think 

you wanted—I am sorry, Mr. Chairman. I think we are running 

over. 

Mr. KEMPTHORNE. Senator Warren, thanks very much for the 

line of questioning, and just a clarification. There currently is not 

an FSOC off ramp from designation. There is language that is proposed in Senator Shelby’s bill that would provide that off ramp. 

Senator WARREN. I think we have had testimony, though, from 

those on the FSOC saying that adjustment is possible so that if 

risk is reduced, then FSOC designation changes, which sounds to 

me an awful lot like an off ramp. 

Mr. KEMPTHORNE. Again, Senator Warren, based on the input I 

have received from the member companies that have been so designated, I do not believe they know what would be elements necessary to be de-designated. 

Senator WARREN. All right. Fair enough on the transparency 

point, and one we have certainly had this conversation, I think 

with those who have testified before us. But they have indicated 

there are ways to change FSOC designation and that it is important to review how much risk is posed. 

You know, I just want to make the point, as I see it—and we 

have heard the testimony repeatedly in front of this Committee 

that once a company is designated as systemically important here 

in the United States, the company should have a chance to reverse 

that designation if it can show that it no longer poses a systemic 

risk. 


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The United States, according to those who have testified in front 

of us, say that we now permit this, and I believe the FSB should 

do so as well. It seems to me that is fully consistent with the FSB’s 

important mission of making global financial markets safer. 

Thank you, Mr. Chairman. Sorry to run over. 

Chairman SHELBY. Senator Warren, I believe Mr. Wallison has 

a comment. 

Senator WARREN. Yes. 

Mr. WALLISON. I just have a small point here, but the problem 

is that we do not understand the metrics that either the FSOC or 

the FSB uses to designate a company as a SIFI. And we could 

avoid a lot of problems, including the need for an off ramp, if it 

were clear to companies before they were designated what they 

could do to keep from being designated. That is not available to 

anyone, but it is in the Chairman’s bill and makes a certain 

amount of sense. We reduce a lot of the legal costs and other problems that companies have if they are condemned to be SIFIs and 

regulated by the Fed. 

Senator WARREN. Well, as I said earlier, I think it is important 

that there be transparency about what it is that causes an FSOC 

designation and that it is important that the company have the alternative of choosing to reduce its own risk so that it has an exit 

ramp from FSOC designation. 

Thank you very much, Mr. Chairman. 

Chairman SHELBY. Thank you, Senator Warren. Thank you for 

raising the question. 

Senator Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chairman, and 

thank you all for your testimony. 

As a strong supporter of our State-based insurance regulatory 

system, I share the concern of many of my colleagues and some of 

the witnesses that an international body would set standards for 

U.S. financial institutions. During the trade debate that we just 

had, I supported Senator Warren’s amendment to the Trade Promotion Authority Act that would limit the inclusion of financial 

services in future agreements. Unfortunately, we did not pass that 

amendment. I wish otherwise. But I am concerned about international organizations setting structures that might diminish our 

regulation of risk within our own American economy. So U.S. officials at the very least should have a say in efforts to change or influence our financial regulatory system. 

The conversation about the FSB, we are represented right now 

by the Federal Reserve Board, the Treasury Department, the Securities and Exchange Commission. Governor Kempthorne, as a representative of the life insurers, do you see this as sufficient or the 

appropriate representation or specific recommendations for how 

that might be changed? 

Mr. KEMPTHORNE. Senator Merkley, thanks for the question. 

Without question, with regard to Treasury, they need to have developed the additional expertise on the insurance industry. There 

is a step forward in the designation by Dodd-Frank of the Federal 

Insurance Office. Director Mike McRaith is doing a commendable 

job in that position. But I think some of the reports that perhaps 

have not come out in the timeframe first suggested may suggest 


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that the vetting of those reports is more difficult because there is 

not the insurance expertise at this point within Treasury, with

regard to the Federal Reserve; and, again, we appreciate Governor 

Tarullo’s approach where he is now having opportunities of working groups to just discuss the elements of the industry. With regard 

to the Fed, they have added Tom Sullivan, a former State insurance commissioner, who is doing a fine job at the Fed. 

But I would add, Senator Merkley, when we had post crisis and 

the Fed decided to put in a low interest rate environment, we sent 

teams of two to four insurance industry CEOs to every regional 

Fed President, and I will tell you that the comments were such as: 

‘‘We did not even have anecdotal evidence about your industry.’’ 

‘‘We did not realize that you were the number one U.S. investor in 

corporate bonds.’’ ‘‘We did not realize that, on average, you hold 

your investments for 17 years, quite different than banks.’’ ‘‘We did 

not realize what a capital source you could be for infrastructure.’’

So I think through those comments, Senator, you realize that 

those who are now given responsibility with regard to the wellbeing and the regulation of the industry have a learning curve. 

They are on the curve. We appreciate their efforts. But there is still 

a tremendous amount that needs to be done. 

I would add that is true of the FSB as well, which is populated 

in a great deal by banks. 

Senator MERKLEY. Well, your points are well taken. Thank you. 

And if I could just summarize it, it is not so much who is there 

as how they proceed to educate themselves on the issues, the huge 

range of issues that are important, and in your cases specifically 

the life insurance industry. 

I just would like to ask the parallel question, if anyone else 

wants to chip in, about ways that U.S. representation could be improved on the FSB. Mr. Stevens? 

Mr. STEVENS. Senator, I think it is a substantive issue, not just 

a process issue. But you have to look closely at the FSB as an organization and ask yourself who its members are. By and large, the 

members are central bankers and finance ministry officials. They 

do have some capital markets regulators, like the Securities and 

Exchange Commission. Virtually the entire leadership—that is to 

say, the head of the FSB, the head of its important working committees, and things of that sort—are all central bankers. I think 

the IOSCO statement makes it very clear that having now experienced over a couple of years an effort collaboratively within the 

FSB to work, that they have said this is not going to be satisfactory, we have got to take a different approach. 

And so what we take from all of that is the need to reconstitute 

some international body and to give capital markets regulators, 

and insurance regulators for that matter, a co-equal place at the 

table. Because if the mandate is to look at the entire global financial system, that is much more than banking, and you need to 

bring the right expertise and background and experience to bear. 

The FSB simply cannot do that as it is currently constituted. 

Senator MERKLEY. Thank you. Yes? 

Mr. POSEN. Senator Merkley, just very rapidly, as I said in my 

written testimony, like others here, I support filling the particular 

gap that we have in insurance knowledge where I think the EuroVerDate 0ct 09 2002 11:57 Dec 20, 2016 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 L:\HE3E8B~1\07-08T~1.REG\HEARING\97398.TXT SHERYL

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pean regulators are going amok. But that said, I think it is very 

important that we pick up on something Senator Brown and I

exchanged upon earlier, which is that the FSB by its international 

nature also provides a certain amount of insulation against industry lobby groups and against national champions of various companies. And I think it is important that we do not make this into a 

body that, for all our desire for admin law, not oppressing any individual company that does not—that gets captured in the way that 

various specific regulators got captured in the past. And we always 

have to be suspicious when you can say central bankers have limitations. I am one of that breed, and I certainly have mine. But the 

fact remains that we know that there are particular industry-designated regulators who become captured either in corrupt terms or 

intellectual terms by those industries, and we do not want this to 

become that again. 

Senator MERKLEY. And so if I can capture your comment, while 

expertise is essential in order for the FSB to have insight on key 

industries in various countries, you are raising the concern that the 

regulators, the FSB, not be intellectually captured by those industries. 

Yes, Mr. Wallison? 

Mr. WALLISON. I would like to add one thing here, and that is, 

we have to understand that the FSB as well as the FSOC, whatever decision they come to, is an agreement among regulators. Regulators have an interest in having more power and more opportunity to control the direction of their respective economies. So although it is a good idea to have regulators talk to one another, discuss ways that they can address things, I think we have to recognize that regulation can be imposed because regulators want it to 

be imposed, and from the standpoint of the United States, where 

we have very free capital markets which have kept us ahead of almost the rest—actually created the economy that we have in the 

United States today, which is the best in the world, we have to be 

concerned that someone is speaking from the standpoint of the 

United States. And when we look at what the Fed wants to do, 

which is to get control of shadow banks, which is basically our entire capital market system, we have to be worried about that and 

be sure that whatever the FSB does, or even the FSOC, it is consistent with what Congress wanted when it created the DoddFrank Act. And I am afraid that we are not exactly clear on that 

right now. 

Senator MERKLEY. Thank you very much, and my time has expired. Thank you, Mr. Chairman. 

Chairman SHELBY. Mr. Stevens, I would like to ask you a question about mutual funds and the model. It is totally different from 

banking, as we know. We know insurance is different. We know 

that you are dealing with financial products and so forth. And you 

brought it up earlier. If you are a $100 billion mutual fund, you 

have that under management. Now, if you are 25, that does not 

change the risk, does it? If you are big, you might be so well run 

and so forth. But explain basically the difference in the model of 

a bank and a managed fund, just for the record. 


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Mr. STEVENS. Well, in the case of United States mutual funds, 

Mr. Chairman, irrespective of their size, there are still certain principles that apply. 

Chairman SHELBY. Absolutely. 

Mr. STEVENS. They use little to no leverage, which dramatically 

distinguishes them from banks. They act as agents, not principals, 

so that the adviser is not retaining risk at the adviser’s level. 

Whatever the——

Chairman SHELBY. They are spreading the risk, aren’t they? 

Mr. STEVENS. That is correct, and——

Chairman SHELBY. They are spreading the risk. If I buy mutual 

funds, I am taking a risk in a sense. I am hoping it goes up, but 

it could go down. Right? 

Mr. STEVENS. And it does both over a cycle. 

Chairman SHELBY. Sure. 

Mr. STEVENS. But all those investment risks are then experienced by the underlying shareholders in their millions. They are 

also highly transparent, Mr. Chairman. The amount of information 

you can get about how a mutual fund and its portfolio and the like 

are managed is really quite dramatic. 

There is also extensive regulation that is calculated to control 

risks, and, frankly, that is why even these largest funds exhibited 

a remarkable degree of stability in the financial crisis. Now, this 

is the second worst financial crisis since the early 19th century. 

Some of our stock and bond fund investors lost very substantial 

portions. Equity funds went down 40, 45 percent—even more. 

There was no panicky sell-off——

Chairman SHELBY. The same thing with 401(k), our pension 

funds, everything up and down. That is the market. 

Mr. STEVENS. That is exactly right. 

The other thing, Senator, is that our industry in the United 

States is largely a retail industry. Upwards of 90 percent of our investors are individual investors who are saving for very long-term 

purposes. So they do not look at mutual funds as a short-term trading proposition. They look at it as something that they are going 

to stick with—and they did stick with them during the crisis—for 

the very longest term and most important financial goals that they 

may have. 

Chairman SHELBY. Let me ask you this. Let us say I could buy 

through a mutual fund part of an index fund, right? 

Mr. STEVENS. Yes. 

Chairman SHELBY. How are you going to regulate the index fund 

which is based, say, on the S&P 500 or some other model like that? 

Basically you are tracking the market, aren’t you? 

Mr. STEVENS. That is exactly right, Senator, and in the FSB’s 

methodologies, there are a number of very large index funds that 

would be captured, because they tend to grow above $100 billion 

as they are sponsored by some firms in the United States. 

So you ask yourself then, that recommendation comes to the 

FSOC, and were the FSOC to say, yes, you know, you are right, 

FSB, we need to designate that fund, how then would the provisions of Title I of Dodd-Frank apply in that case? They are actually 

nonsensical as you think of them in the context of a mutual fund, 

and to me that is the very best evidence that when Congress put 


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Dodd-Frank together, it never intended the result that Title I of 

Dodd-Frank would be brought to bear against our largest mutual 

funds unless that title is looked at as a roving commission by the 

Federal Reserve simply to get more and more and more of the U.S. 

financial system under its jurisdiction. I think Congress did not intend that at all. 

Chairman SHELBY. I agree. But, Mr. Wallison, let me ask you a 

question, and then any comment you want to follow up on that. 

The ramp in the legislation, some of it I proposed, if you are designated—and Senator Warren got into this, which I think was an 

excellent topic. If you are designated, that is not an easy thing. 

That is tough. Most people have a way through process to get undesignated or get off the hook, so to speak, probation or whatever 

you want to call it. I do not believe that they have, although they 

alluded to it here, that there is a way to get off, because it is not 

explicit, it is not transparent. There is no mechanism that I understand to do it. Once you are designated, you know, a lot of people 

say you are damned in a way. Do you want to comment on that? 

Mr. WALLISON. Well, I think it is absolutely true, Mr. Chairman, 

that once you are designated, unless there is a clear way for you 

to exercise an off ramp in some way, you are damned. But look at 

it this way: If you do not know why you have been designated——

Chairman SHELBY. That is exactly right. 

Mr. WALLISON. And that is where we are today. 

Chairman SHELBY. Well, that is what Senator Warren got 

into——

Mr. WALLISON. Right, and she is completely right. If you do not 

know why you have been designated, there is no way that you can 

exercise the off ramp unless the regulating agency, like the FSOC, 

is willing to say to you, well, you were designated for this particular reason or these four particular reasons, and if you eliminate 

all of those things, well, then, we will un-designate you. But apparently we have no indication that the FSOC at least is willing to do 

that, and certainly not the FSB. 

If I may follow up, Mr. Chairman, on one issue——

Chairman SHELBY. Go ahead. Go ahead. 

Mr. WALLISON.——you were talking about with Mr. Stevens, and 

that is, mutual funds, the key issue here is what is called ‘‘maturity transformation.’’ Mutual funds and other investment organizations do not involve maturity transformation. That happens to be 

the riskiest thing that banks do. They borrow money short term 

and lend it out long term. That is maturity transformation, and it 

is very risky because the funds you lent out could be withdrawn 

by depositors when you are a bank. Mutual funds do not have that 

problem and should not——

Chairman SHELBY. And neither do insurance companies. 

Mr. WALLISON. And insurance companies, too. Mutual funds and 

insurance companies and other capital markets operators generally 

do not have that problem at all. Yet the FSB says, as I said in my 

oral statement, the FSB says that complex chains of transactions 

can create maturity transformation collectively. That raises the 

question of whether all of these small firms operating in the capital 

markets, engaged in these complex chains of transactions, could be 


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designated by the FSOC. Certainly that is what the FSB is after. 

And whether the FSOC has the power to do that is the problem. 

Chairman SHELBY. Mr. Scalia, do you want—I know you want to 

answer that, too—to get into due process? It seems like there is 

lack of due process here, but go ahead. 

Mr. SCALIA. Thank you, Mr. Chairman. In a sense, that is what 

I wanted to comment on. This exit ramp idea is a very important 

one. It would be a significant contribution of your bill, and it would 

be good if agencies, FSOC in this case, disclosed to companies what 

FSOC needed to be done in order for that company not to be systemic. 

But I think we would want to avoid a circumstance where a company’s fate depended on FSOC’s opinion or FSOC’s whim, FSOC 

saying, ‘‘We have decided you do this, that, or the other thing, and 

then you will be OK.’’

Obviously what we need as well is discernible, ascertainable 

legal and empirical standards that the public can look to and judge 

for themselves what they need to do, and if FSOC, for example, declines to de-designate, that those entities can have the confidence 

that they could go to court and say, ‘‘Look at all we did, but FSOC 

is not letting us out of the pen.’’

Mr. Stevens mentioned the importance of evidence-based approaches, and that has been lacking as well in FSOC’s decisionmaking. So I think in addition to providing the off ramp, it will be 

very important in the future for FSOC to base its decisions more 

on a closer empirical and evidentiary approach toward its task. 

Chairman SHELBY. Governor? 

Mr. KEMPTHORNE. Mr. Chairman and, again, Senator Warren, I 

think this answers a bit to what we were discussing and that is 

with regard to the off ramp that may exist. In the Dodd-Frank Act, 

it does call for an annual review of a designated company by FSOC. 

However, as Mr. Wallison pointed out, they do not know what was 

the criteria, the metrics that made them designated in the first 

place. 

If there was an existing off ramp, I think a major company would 

not have felt that they needed to go through a legal process. Currently there is no appeal process with regard to designation of a 

SIFI, and that is why we do commend and support the concept of 

an off ramp of a designation so you can de-designate knowing what 

it was that put you there in the first place. 

Chairman SHELBY. Thank you. 

Senator Warren, do you have any comments? 

Senator WARREN. No. I am good. Thank you, Mr. Chairman. 

Chairman SHELBY. I thank all of you for the hearing. This is 

very important, and we appreciate your contributions here today. 

Thank you very much. 

Mr. KEMPTHORNE. Thank you. 

[Whereupon, at 11:40 a.m., the hearing was adjourned.] 

[Prepared statements and additional material supplied for the 

record follow:]


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PREPARED STATEMENT OF DIRK KEMPTHORNE

PRESIDENT AND CEO, AMERICAN COUNCIL OF LIFE INSURERS

JULY 8, 2015

Chairman Shelby, Ranking Member Brown, and Members of the Committee, I am 

Dirk Kempthorne, President and CEO of the American Council of Life Insurers 

(ACLI). ACLI is the principal trade association for U.S. life insurance companies 

with approximately 300 member companies operating in the United States and 

abroad. ACLI advocates in Federal, State, and international forums for public policy 

that supports the insurance marketplace and the 75 million American families that 

rely on life insurers’ products for financial and retirement security. ACLI member 

companies offer life insurance, annuities, reinsurance, long-term care and disability 

income insurance, and represent more than 90 percent of industry assets and premiums. 

ACLI appreciates the opportunity to address the impact of the Financial Stability 

Board (FSB) on the U.S. regulatory framework. ACLI recognizes the important role 

of the FSB in enhancing international cooperation and coordination among financial 

supervisory organizations. The FSB was formed in 2009 by the G20 to promote financial stability through reform of the international financial regulatory structure. 

Its membership includes financial regulators from 25 major nations, including the 

European Union; international financial institutions, such as the IMF and World 

Bank; and standard-setting bodies, including the International Association of Insurance Supervisors (IAIS) and the International Organization of Securities Commissions (IOSCO). The U.S. representatives to the FSB are the Department of the 

Treasury, the Federal Reserve, and the Securities and Exchange Commission. 

My testimony focuses on two standard-setting actions by the FSB and its member 

organizations that intersect with the powers and authorities of the Financial Stability Oversight Council (FSOC) and the Federal Reserve Board. Those standard-setting actions are the designation of ‘‘globally systemically significant’’ insurers and 

the establishment of an international capital standard for insurers. More specifically, ACLI is concerned that——

• FSB’s designations of G–SIIs have prejudged FSOC’s designations and placed 

designated insurers at a competitive disadvantage in the marketplace;

• The FSB and FSOC have not applied consistent standards to the designation 

of nonbank financial companies; and

• There is a potential for conflict between insurer capital standards being developed by the Federal Reserve Board and those under development by the IAIS. 

These new standards may also unnecessarily deviate from the existing, proven 

insurance risk-based capital regime U.S. State insurance regulators use today.

To address these concerns, ACLI is recommending that——

• The designation process for insurers should be replaced with ‘‘activities-based’’ 

regulation that avoids the negative consequences of designating individual companies merely because of size.

• The Federal Reserve Board should finalize the capital standards mandated by 

Congress last year in a manner that is consistent with the Insurance Capital 

Standards Clarification Act before agreeing to capital standards developed by 

the IAIS; and

• This Committee should exercise vigorous oversight of the capital standard-setting process by the Federal Reserve Board and the IAIS to ensure that the intent of Congress and the competitiveness of the U.S. insurance industry is preserved.

Before I address those issues, however, I would like to commend Chairman Shelby 

and the Committee for The Financial Regulatory Improvement Act of 2015. 

Financial Regulatory Improvement Act 

The Financial Regulatory Improvement Act reflects many of the principles of 

transparency, accountability, and due process that are supported by ACLI and its 

member companies. In particular the bill:

(1) Proposes important, meaningful reforms that would strengthen Financial Stability Oversight Council procedures and ultimately facilitate a reduction in 

systemic risk;

(2) Increases opportunities for stakeholder input and Congressional oversight of 

the International Association of Insurance Supervisors regarding the developVerDate 0ct 09 2002 11:57 Dec 20, 2016 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6621 L:\HE3E8B~1\07-08T~1.REG\HEARING\97398.TXT SHERYL

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1Global Systemically Important Insurers (G–SIIs) and the Policy Measures That Will Apply 

to Them, Financial Stability Board, July 18, 2013. 2Global Systemically Important Insurers: Initial Assessment Methodology, International Association of Insurance Supervisors, July 2013. 3 Basis of the Financial Stability Oversight Council’s Final Determination Regarding American 

International Group, Inc., Financial Stability Oversight Council, July 8, 2013. 4 Basis for the Financial Stability Oversight Council’s Final Determination Regarding Prudential Financial, Inc., Financial Stability Oversight Council, September 19, 2013. 5 Basis for the Financial Stability Oversight Council’s Final Determination Regarding MetLife, 

Inc., Financial Stability Oversight Council, December 18, 2014. 6http://www.treasury.gov/initiatives/fsoc/council-meetings/Documents/September%2019%

202013%20Notational%20Vote.pdf. 7http://www.treasury.gov/initiatives/fsoc/designations/Documents/Dissenting%20and%20

Minority%20Views.pdf.

ment of international capital standards. ACLI commends Senators Dean Heller (R–Nev.) and Jon Tester (D–Mont.) for their strong leadership on this issue;

(3) Requires the Federal Reserve Board to plan for the different kinds of nonbank 

financial companies, including insurance companies that it supervises; and

(4) Includes language from the Policyholder Protection Act of 2015, which would 

afford insurance policyholders in the context of a savings and loan holding 

company structure the same protections as those currently provided under the 

Bank Holding Company Act.

ACLI urges the Committee to move this important legislation to the full Senate for 

consideration. 

FSB’s Designations of Globally Systemically Important Insurers (GSIIs) Seems to 

Have Prejudiced FSOC’s Designations and Placed Designated Companies at a 

Competitive Disadvantage 

Both FSB and FSOC have designated three U.S. insurers as ‘‘systemically important.’’ In July 2013, the FSB, in consultation with the IAIS, designated nine insurers as G–SIIs, including three U.S. insurers: AIG, Prudential and MetLife.1 These 

designations were based upon a methodology developed by the IAIS.2 The FSB envisioned that designated companies would be subject to certain policy measures, 

which would be developed by the FSB and IAIS and implemented by member countries. Those policy measures include recovery and resolution planning requirements, 

enhanced group supervision, and higher loss absorbency requirements for nontraditional activities. 

FSOC also has designated AIG, Prudential and MetLife as systemically important, subjecting them to supervision and regulation by the Federal Reserve Board. 

FSOC’s designation of AIG occurred on July 8, 2013, just days before the FSB initial 

designations.3 Prudential was designated by FSOC in September 2013,4 and MetLife 

was designated in December 2014.5 The regulation of these companies by the Federal Reserve Board includes heightened capital standards, resolution planning requirements, liquidity requirements, and risk management standards. 

FSOC’s independent member having insurance expertise, Roy Woodall, has raised 

serious concerns about the timing of these designations. In his dissents to both the 

Prudential and MetLife designations, Mr. Woodall noted that the FSB’s designations 

were taken in consultation with members of FSOC, and that these discussions appear to have pre-judged FSOC’s independent designation process:

Although not binding on the Council’s decision, the declaration of Prudential as a G–SII by the FSB based on the assessment by the United States 

and global insurance regulators, supervisors, and others who are members 

of the IAIS has overtaken the Council’s own determination process.6

It is clear to me that the consent and agreement by some of the Council’s 

members at the FSB to identify MetLife a G–SIFI, along with their commitment to use their best efforts to regulate said companies accordingly, sent 

a strong signal early on of a predisposition as to the status of MetLife in 

the United States—ahead of the Council’s own decision by all of its members.7

ACLI shares Mr. Woodall’s concern. FSOC has a mandate to designate nonbank 

financial companies for supervision by the Federal Reserve Board based upon criteria established by Congress, and FSOC’s designation decisions should not be predetermined by the actions of the FSB. 

A lack of transparency and due process compounds this concern. While the FSB 

has stated that it follows a designation methodology developed by the IAIS, the FSB 

designations are not accompanied by any explanation or rationale. Nor are desVerDate 0ct 09 2002 11:57 Dec 20, 2016 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6621 L:\HE3E8B~1\07-08T~1.REG\HEARING\97398.TXT SHERYL

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8See, Conversation with Governor Tarullo, Institute for International Finance, North American Summit, June 4, 2015; https://www.youtube.com/watch?v=dV1tJMX-z2c&feature=

playerlembedded; and Remarks of Greg Medcraft, Chairman, International Organization of Securities Commissions, to the National Press Club, Washington, DC, on ‘‘IOCSO and the International Reform Agenda for Financial Markets,’’ June 22, 2015. 9Press Release, U.S. Treasury Department, Financial Stability Oversight Council Meeting, 

July 31, 2014. 10Office of Financial Research, Asset Management and Financial Stability, Sept. 2013. 11 

Press Release, U.S. Treasury Department, Financial Stability Oversight Council (FSOC) to Host 

Public Asset Management Conference, March 28, 2014. 11Press Release, U.S. Treasury Department, Financial Stability Oversight Council (FSOC) to 

Host Public Asset Management Conference, March 28, 2014. 

ignated companies accorded any ability to engage directly with the FSB or challenge 

a designation. Moreover, there is no transparency surrounding the FSB’s actual

directions to the IAIS, other than what the IAIS or FSB chooses to announce after 

the fact. 

The immediate and potential negative consequences of designation are significant. 

The insurance industry is highly competitive, and the additional regulation imposed 

upon a designated company can place that company at a significant competitive disadvantage relative to its nondesignated competitors. Capital standards are the most 

obvious example. If capital requirements on designated insurers are materially different from those imposed by the states, designated insurers may find it difficult 

to compete against nondesignated competitors, resulting in a loss of business or an 

altered product mix. Less competition or less product availability is not in keeping 

with a healthy market that best serves insurance consumers. Even before any additional regulation is implemented, the prospect of such regulation has an immediate 

impact as it forces designated companies to manage their operations taking into account looming but unspecified regulatory requirements. 

FSB and FSOC Should Pursue ‘‘Activities-Based’’ Regulation of Insurers Rather 

than Designating Individual Companies 

FSB and FSOC have taken markedly different approaches in their treatment of 

different categories of nonbank financial companies. While FSB and FSOC have designated three U.S. insurers for heightened supervision and regulation, they are pursuing an ‘‘activities-based’’ approach for asset managers rather than the imposition 

of heightened regulation on individual companies merely because of size. 

Recent public statements by Federal Reserve Board Governor Daniel Tarullo and 

by Greg Medcraft, the Chairman of IOSCO, have acknowledged this different treatment accorded asset managers over insurers.8

The difference in treatment also is evident in the manner in which FSOC has approached the evaluation of insurers and asset managers. Instead of designating 

asset managers, FSOC has directed its staff to ‘‘undertake a more focused analysis 

of industry-wide products and activities to assess potential risks associated with the 

asset management industry.’’9 This request followed the release of a study by the 

Office of Financial Research on asset management and financial stability, which 

FSOC had requested ‘‘to better inform its analysis of whether—and how—to consider such firms for enhanced prudential standards and supervision.’’10 This request 

also followed a conference on the asset management industry by FSOC ‘‘to hear directly from the [asset management] industry and other stakeholders, including academics and public interest groups, on [the asset management industry and its activities].’’11 At that conference, FSOC members heard from representatives of the 

Securities and Exchange Commission, the Bank of England, New York University, 

Columbia Business School, and the Wharton School, as well as several asset management companies. No such public hearing was conducted to engage insurers and 

other stakeholders about the insurance industry. 

In sum, the FSOC’s actions with regard to the asset management industry stand 

in sharp contrast to FSOC’s treatment of the insurers. FSOC has pursued the designation of individual insurance companies and provided the public with little, if 

any, insight into the rationale for those designations or how designations could have 

been avoided. 

Moreover, FSOC has pursued this approach despite the fact that one of the principal authors of the Dodd-Frank Act has stated publicly that he sees no difference 

between the asset management industry and the insurance industry when it comes 

to systemic risk. In a hearing before the House Financial Services Committee last 

year, former Congressman Barney Frank told the Committee that ‘‘I don’t think 

asset managers or insurance companies that just sell insurance as it’s traditionally 


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12 Assessing the Impact of the Dodd-Frank Act Four Years Later Before the H. Comm. On 

Fin. Serv., 113th Cong., Statement of the Honorable Barney Frank during question and answer 

session, unofficial transcript. 

defined are systemically defined . . . Their failure isn’t going to have that systemic 

reverbatory [sic] effect.’’12

ACLI finds this disparate treatment of insurers inexplicable and distressing. Why 

has FSOC undertaken a thoughtful analysis of one category of nonbank companies, 

but not another? Why has FSOC concluded that an ‘‘activities-based’’ approach to 

regulation is appropriate to asset managers, but not insurers? 

The Dodd-Frank Act gives FSOC two principal powers to address systemic risk. 

One power is the authority to designate nonbank financial companies for supervision by the Federal Reserve Board. The other power is an ‘‘activities-based’’ authority to recommend more stringent regulation of specific financial activities and 

practices that could pose systemic risks. 

FSOC’s power to recommend more stringent regulation of specific activities and 

practices has distinct public policy advantages over its power to designate individual 

companies for supervision by the Federal Reserve Board. FSOC’s power to recommend primary regulator action brings real focus to the specific activities that 

may involve potential systemic risk and avoids the competitive harm that an individual company may face following designation. As I have noted above, in certain 

markets designated companies can be placed at a competitive disadvantage to nondesignated companies because of different regulatory requirements. Finally, the 

power to recommend avoids the ‘‘too-big-to-fail’’ stigma that some have associated 

with the designation of individual companies. 

FSOC’s recommendations for more stringent regulation of certain activities and 

practices must be made to ‘‘primary financial regulatory agencies.’’ These agencies 

are defined in the Dodd-Frank Act to include the SEC for securities firms, the CFTC 

for commodity firms, and State insurance commissioners for insurance companies. 

A recommendation made by FSOC is not binding on such agencies, but the DoddFrank Act includes a ‘‘name and shame’’ provision that encourages the adoption of 

a recommendation. That provision requires an agency to notify FSOC within 90 

days if it does not intend to follow the recommendation, and FSOC is required to 

report to Congress on the status of each recommendation. 

ACLI believes that FSOC and FSB should both pursue an ‘‘activities-based’’ approach to insurers through their processes and not rely on designations, in the same 

manner that they are pursuing such an approach to asset managers. Failure to do 

so raises a fundamental question of fairness and casts doubt on the legitimacy of 

the policies and practices of FSOC and the FSB. 

The Federal Reserve Board Should Finalize the Capital Standards Mandated by the 

International Capital Standards Clarification Act Before Agreeing to IAIS 

Standards 

Both the Federal Reserve Board and the IAIS are developing insurance capital 

standards that are likely to have significant impacts on life insurance companies. 

Considered together, these two initiatives directly affect approximately 60 percent 

of the direct premiums of ACLI member companies. If these standards are bankcentric or inconsistent with capital standards developed by State insurance supervisors, they will disrupt the marketplace and undermine the ability of life insurers 

to provide long-term, guaranteed retirement products to savers and retirees. 

To ensure the best possible outcome for policyholders, the Federal Reserve Board 

should adhere to the intent of Congress as reflected in the Insurance Capital Standards Clarification Act, which was unanimously approved by Congress last year, and 

develop an insurance capital standard that is appropriate for U.S. insurers and the 

insurance business model. We are encouraged by the fact that the Board has indicated its intent to undertake a methodical, thoughtful approach to the development 

of these standards. Moreover, the Federal Reserve Board should partner with the 

other U.S. representatives to the IAIS (FIO and State insurance supervisors) to ensure that any international insurance standards reflect the unique strengths of the 

U.S. system of insurance supervision. 

It is essential that policymakers correctly address insurance capital standards 

here in the United States first, so that our representatives to the IAIS, ‘‘Team 

U.S.A.,’’ have a stronger, unified position in any international discussions. Common 

sense suggests that the United States should conduct its own process for the development of an insurance capital standard before agreeing to any international standards. The ACLI believes that it is in the best interests of the United States to focus 

on domestic rulemaking first and ensure that the domestic process is as thoughtful, 

informed, and transparent as possible. 


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13 ‘‘The IAIS Risk based Global Insurance Capital Standard (ICS): Ultimate and Interim 

Goals, Principles for Development and Delivery Process’’ June 25, 2015. 

* The views expressed in this testimony are those of the author alone and do not necessarily 

represent those of the American Enterprise Institute.

The Federal Reserve Board’s capital setting process should include formal rulemaking with notice and public comment, and ACLI is grateful that the Federal Reserve Board has indicated it will proceed in this way. Any insurance capital standard must reflect the long-term nature of life insurers’ investments and the need to 

match investments with the long-term duration of insurance liabilities. Bank standards that favor short-term assets simply do not work for the insurance company 

business model, in which commitments to provide benefits to insurance policyholders and annuity contract holders often last many decades. 

The ACLI has been actively engaged with the Federal Reserve Board on a proposed capital regime for insurance companies. The IAIS timeline must accommodate 

the Federal Reserve Board’s implementation of the Insurance Capital Standards 

Clarification Act. These processes should not be abbreviated or confused by a rushed 

IAIS timeline. Just last month, the IAIS released a proposal for higher loss absorbency capital standards and reiterated plans to finalize these standards by the end 

of this year. The Federal Reserve Board’s rulemaking process should proceed normally and allow ample time for notice and public comment. The three U.S. representatives to the IAIS should not agree to anything at the IAIS that would interfere with a robust and thoughtful rulemaking process here in the United States. In 

fact, the IAIS process would benefit from the work being conducted by the Federal 

Reserve Board and should adjust its timeline accordingly. 

ACLI is encouraged by the recent IAIS announcement to develop international insurance capital standards, particularly the ICS, through a staged and incremental 

process that will be more respectful of and informed by jurisdictional developments.13 This is a clear example of Team U.S.A. working on all cylinders to achieve 

a positive outcome for U.S. insurers and insurance markets. However, much work 

remains to be done, including further and deeper consideration and analysis of what 

types of activities actually create systemic risk in the insurance model. Getting our 

standards completed at home needs to happen first. 

ACLI commends the three U.S. representatives to the IAIS for the important 

partnership that they have established in the Team U.S.A. approach. Only by working together, meeting regularly, coordinating their efforts, and agreeing to common 

objectives, the Federal Reserve Board, FIO, and State insurance supervisors are 

best positioned to represent the United States and secure the best outcome for U.S. 

consumers and insurers. The Team U.S.A. concept constitutes an effort to speak 

with a strong, unified voice as part of any IAIS discussions and ACLI fully agrees 

with the wisdom of this approach. 

ACLI urges this Committee to exercise vigorous oversight of the capital standardsetting process by the Federal Reserve Board and the IAIS to ensure that the intent 

of Congress and the competitiveness of the U.S. insurance industry are preserved. 

Congressional oversight of the development of a workable domestic capital standard 

for U.S. insurers will help support the goal of a well-capitalized and competitive insurance industry that continues to serve the needs of U.S. consumers. 

PREPARED STATEMENT OF PETER J. WALLISON *

ARTHUR F. BURNS FELLOW IN FINANCIAL POLICY STUDIES, AMERICAN

ENTERPRISE INSTITUTE

JULY 8, 2015

Chairman Shelby, Ranking Member Brown and Members of the Senate Banking 

Committee:

Thank you for the opportunity to testify in this important hearing. 

My name is Peter J. Wallison. I am the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute. The opinions expressed below are 

mine alone and not necessarily those of the American Enterprise Institute. 

This testimony will discuss the relationship among the Federal Reserve, the Financial Stability Oversight Council (FSOC) established by the Dodd-Frank Act, and 

the Financial Stability Board (FSB). As this Committee is aware, the FSB is a largely European group of financial regulators and central banks which was deputized 

by the G–20 leaders in 2009—after the financial crisis—to reform the international 


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1Financial Stability Board, ‘‘Overview of Progress in Implementation of the G20 Recommendations for Strengthening Financial Stability’’ Report of the Financial Stability Board to G20 Leaders, September 5, 2013, p3. 2See, for example, FSB, ‘‘Consultative Document/Strengthening Oversight and Regulation of 

Shadow Banking/An Integrated Overview of Policy Recommendations,’’ November 18, 2012, p1. 3Stanley Fischer, speech at a Bundesbank conference on March 27, 2015, p2. 

financial system.1 The Treasury, the Federal Reserve and the SEC are members of 

the FSB. 

Summary of this testimony 

This testimony makes the following points:

• Both the FSB and the Fed have determined to impose prudential regulation—

i.e., regulation of risk-taking—on what they call the ‘‘shadow banking system.’’ 

They define the shadow banking system as all financial intermediation outside 

the regulated banking system.

• Shadow banks, then, are essentially all the nonbank firms that operate in in 

today’s U.S. capital markets-broker dealers, asset managers, hedge funds, mutual funds, insurance companies and many others.

• The FSB and the Fed believe that ‘‘complex chains of transactions’’ among these 

firms can create risks to financial stability that are similar to the failure of a 

large financial firm.

• On this basis, the FSB could decide that all member countries should impose 

prudential regulation on firms active in the capital markets-that is, shadow 

banks.

• The question is whether an agreement at the FSB to impose prudential regulation on complex chains of transactions can be enforced in the United States 

under the Dodd-Frank Act.

• Section 113 of the Dodd-Frank Act provides the FSOC (and thus the Fed) with 

authority to designate firms as SIFIs because of their ‘‘mix of activities.’’ These 

activities could be deemed to include participating in ‘‘complex chains of transactions.’’

• Although this would be a major extension of the language in the Dodd-Frank 

Act, it is possible that the courts would defer to the FSOC’s interpretation.

• If the Committee does not want prudential regulation imposed on the capital 

markets, it must act to prevent this outcome, through amending Dodd-Frank 

or through aggressive oversight of the Fed, FSOC and Treasury. 

Introduction 

In recent years, both the FSB and the Fed have both expressed a determination 

to impose ‘‘prudential regulation’’ on what they call the ‘‘shadow banking system.’’ 

Prudential regulation generally refers to a regulator’s ability to supervise or control 

the risk-taking of regulated firms, and the shadow banking system—as defined by 

the FSB—includes all financial intermediation that is not subject to bank-like prudential regulation.2 The Fed also accepts this definition. Stanley Fischer, vice chair 

of the Fed, refers to ‘‘nonbank financial intermediation’’ as including ‘‘insurance 

companies, finance companies, Government-sponsored enterprises, hedge funds, security brokers and dealers, issuers of asset-backed securities, mutual funds and 

money market funds.’’3 These are most of the major participants in the U.S. capital 

markets, and thus the prudential regulation of shadow banks is the same thing as 

prudential regulation of the U.S. capital markets. 

In general, although capital market firms like broker-dealers, finance companies, 

hedge funds and other types of funds and fund managers are subject to regulations 

of various kinds, these are mainly conduct regulations. Some, such as insurers and 

broker dealers, have capital requirements, but they are all generally free to take the 

risks that their managements consider prudent. Under prudential regulation, as 

bank supervisors see it, they are entitled to examine and criticize management risktaking decisions. For example, the Fed has recently been telling banks that it does 

not want them to make leveraged loans, which the Fed considers excessively risky. 

The Fed has clearly decided that bringing ‘‘shadow banking’’ under prudential 

regulation should be a priority of the agency, and in this effort the Fed and the FSB 

are working together. The Fed’s position was made clear by Governor Daniel Tarullo 

a year ago:

The turmoil that attended the collapse of several large nonbank financial 

institutions, and the extraordinary Government measures necessary to contain the turmoil, had quickly changed into a consensus—previously a


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4Daniel Tarullo, Speech at the Federal Reserve Bank of Chicago, May 8, 2104, p2, http://

www.federalreserve.gov/newsevents/speech/tarullo20140508a.htm. 5FSB, Shadow Banking: ‘‘Scoping the Issues: A Background Note of the Financial Stability 

Board,’’ April 12, 2011, p5. 6FSB, ‘‘Strengthening the Oversight and Regulation of Shadow Banking,’’ April 16, 2012, p 

1. 7FSB, ‘‘Consultative Document (2nd)/Assessment Methodologies for Identifying Non-Bank 

Non-Insurer Global Systemically Important Financial Institutions/Proposed High-Level Framework and Specific Methodologies,’’ March 4, 2015. 

minority view—that prudential regulation should be broadened to better 

safeguard the financial system as a whole.4

The Fed is devoting a great deal of attention to this FSB project—and for good 

reason. Governor Tarullo, is leading the FSB’s work in this area. The close collaboration between the Federal Reserve and the FSB is happening because controlling 

‘‘shadow banking’’ is not something the Fed can do alone; it is too easy for financial 

activities to be conducted outside the Fed’s U.S. jurisdiction. The Fed cannot control 

shadow banking if they focus solely on the United States; pressure on the shadow 

banking system in the United States will only stimulate the development of shadow 

banking activity in other developed markets. The FSB, therefore, is the ideal venue 

for an international agreement to impose coordinated prudential regulation on shadow banking, which in effect means prudential regulation of the international capital 

markets. In one of its first statements on the need to regulate shadow banking, the 

FSB pointed this out: ‘‘It is also important to note that different parts of the [shadow banking] chain are frequently located in different jurisdictions, underscoring the 

need for a global approach to monitoring and policy responses.’’5

The FSB is the successor to something called the Financial Stability Forum, an 

organization of the same developed countries that was formed in 1999 as a discussion group to promote financial stability. In April 2008, the group delivered a series 

of recommendations to the G–7 for increased prudential regulation. After the financial crisis, in 2009, the group was deputized by the G–20 leaders to reform the international financial system, and changed its name to the Financial Stability Board. 

Since then, it used its mandate to broaden its reach and elevate its profile. Its statements regularly refer to the fact that the G–20 leaders have approved or authorized 

its activities. In 2011, according to the FSB, the G–20 leaders agreed to ‘‘strengthen 

the oversight and regulation of the shadow banking system,’’6 and remarkably they 

did this before the FSB had actually defined what shadow banking was. Nevertheless, the FSB has no enforcement powers and—at least in the United States—no 

authority by virtue its G–20 mandate. The FSB says that it is relying on its members to enforce its decisions within their own jurisdictions, if they have the authority 

to do so. 

An apt analogy might be the agreements that are reached among bank regulators 

from many nations under the auspices of the Basel Committee on Bank Supervision. 

The decisions reached there are applied in each of the countries that are participants. This might even be seen by the U.S. regulators as a precedent for the enforceability of any agreement reached at the FSB, but this would be incorrect. The 

U.S. bank regulators already have the statutory authority to impose the capital requirements that are agreed in Basel. Congress has not (to my knowledge) ever questioned that authority. 

This raises the question whether the Dodd-Frank Act or any other U.S. law has 

given U.S. regulators the authority to impose on U.S. firms the decisions that originate in an agreement at the FSB. It is not true, as some may believe, that DoddFrank does not provide authority that can be used for this purpose. Unfortunately, 

as I will discuss below, the excessively broad language of the Dodd-Frank Act may 

permit the FSOC and the Fed to impose substantially the same regulations in the 

United States as the FSB will prescribe for its other members. Moreover, U.S. officials seem to believe that if the FSB adopts prudential regulation for the capital 

markets—that is, the shadow banking system—U.S. regulators will be able to impose it in the United States. If this effort succeeds, it will be a disaster for robust 

economic growth in the United States. Accordingly, this testimony will also explore 

the authorities that the FSOC and Fed might use, at the behest of the FSB, to control shadow banking in the United States. 

In March, 2015, the FSB issued what it called its Second Consultative Document 

on Methodologies for Identifying NonBank Non-Insurer Global Systemically Important Financial Institutions (the Second Consultative Document).7 This is similar to 

a U.S. regulatory agency taking a second set of comments on a proposed regulation 

under the Administrative Procedure Act. The Second Consultative Document is basically a roadmap for FSB members to follow if they wish to subject nonbank firms 


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8 John Heltman, ‘‘Fed’s Tarullo Favors Activities-Based Regulation for Asset Managers,’’ American Banker, June 4, 2015. 9Daniel Tarullo, Speech at the Federal Reserve Bank of Chicago, note 4 above, p1. 

10Stanley Fischer, ‘‘Nonbank Financial Intermediation, Financial Stability, and the Road Forward,’’ March 30, 2015, p.1. http://www.federalreserve.gov/newsevents/speech/

fischer20150330a.htm.

within their jurisdictions to prudential regulation. There is little question that 

under the Dodd-Frank Act the FSOC could designate any financial firm as a systemically important financial institution (SIFI), and in fact after the FSB designated 

three U.S. insurers as global SIFIs, the FSOC did the same. 

Many of the comments submitted by U.S. firms on the Second Consultative Document reflected concern that the FSB will designate large U.S. firms—especially 

large investment funds and asset managers—as global SIFIs. That concern arose, 

presumably, because of fear that an FSB designation would provide a foundation for 

the FSOC to do the same. To forestall this possibility, the FSB was urged instead 

to consider regulating ‘‘activities’’ rather than designating SIFIs. This approach, as 

discussed below, is not without risk. Limiting the FSB and the FSOC to regulating 

activities, instead of designating SIFIs, may not prevent the FSOC and the Fed from 

imposing prudential regulation on virtually all firms that operate in the capital markets, including asset managers, regardless of size.

In a recent speech, Governor Tarullo said that he favors ‘‘activities-based regulation’’ for asset managers,8 and with Tarullo’s support it is likely that the FSB will 

oblige. But as I will show several provisions of Dodd-Frank, if interpreted broadly 

by the FSOC and the Fed, could enable the Fed to place many transactions that 

are routine activities in the U.S. capital markets under what is essentially prudential control. 

The need to cover these activities was outlined by Governor Tarullo a year ago: 

‘‘Prudential regulation,’’ he said, ‘‘must deal with threats to financial stability 

whether or not those threats emanate from traditional banking organizations. Hence 

the need to broaden the perimeter of prudential regulation, both to certain nonbank 

financial institutions and to certain activities by all financial actors.’’9 [emphasis 

supplied] This is a statement of determination; if the Dodd-Frank Act provides the 

necessary authority, we may see an effort by the FSOC and the Fed to impose prudential regulation on activities—that is, what they see as excessive risk-taking—in 

the capital markets. 

If this is not acceptable to this Committee it should act to modify these provisions 

before the FSB, the FSOC and the Fed act to impose prudential restrictions on the 

entire U.S. financial system. 

Efforts by the FSB and the Fed To regulate shadow banking 

The widespread concern among bank regulators about ‘‘shadow banking’’ is best 

understood in the context of the competitive challenges facing the heavily regulated 

banking business. Since the mid-1980s, the capital markets have outcompeted banking in the financing of corporate and business borrowers. The chart below shows the 

growing gap between banks and capital markets financing. The existence of this gap 

was recently confirmed by Stanley Fischer, the vice chair of the Fed, when he told 

a banking audience: ‘‘In recent years, about two-thirds of nonfinancial credit market 

debt has been held by nonbanks, which includes market-based funding by 

securitization vehicles and mutual funds as well as by institutions such as insurance companies and finance companies.’’10

Source: Federal Reserve Flow of Funds 


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11FSB, ‘‘Strengthening Oversight and Regulation of Shadow Banking,’’ August 23, 2013, pii. 12 Ben Bernanke, ‘‘Fostering Financial Stability,’’ Speech at 2012 Federal Bank of Atlanta Financial Markets Conference, p2. 13William C. Dudley, ‘‘Fixing Wholesale Funding to Build a More Stable Financial System,’’ 

February 1, 2013. 

To a significant degree, this gap is the result of the relative efficiency of obtaining 

credit through the capital markets rather than banking, and left to itself this gap 

is probably irreversible. However, nonbank competition for banks restricts bank regulators’ freedom in regulating banks. Tightening bank regulation simply makes 

banks even less competitive with the capital markets. A partial solution, then, is 

to gain some kind of regulatory control over the capital markets—the shadow banking system—so that some regulatory burden can also be on shadow banking. The 

financial crisis was a disaster for the American people, but it has provided a unique 

opportunity for bank regulators to seek greater authority over the whole financial 

system, despite their failure to prevent the failure or near-failure of the largest 

banks (and hundreds of smaller banks) in the financial crisis. 

Whatever the motive, the FSB’s analysis of the dangers of shadow banking rests 

heavily on the risks associated with ‘‘maturity transformation,’’ an inherent risk of 

traditional banking. When banks take deposits withdrawable on demand and use 

those funds to make long-term loans they are engaged in what is called maturity 

transformation. By its nature, this is a risky activity because the supporting deposits can be withdrawn while the loan is still outstanding, threatening the bank’s liquidity position. Banks are subject to prudential regulation and have access to the 

Fed’s discount window in part because of this inherent risk. 

The FSB has argued that the shadow banking system is also subject to this risk. 

For example, in a paper outlining its effort to gain some control of shadow banking, 

the FSB stated:

[E]xperience from the crisis demonstrates the capacity for some nonbank 

entities and transactions to operate on a large scale in ways that create 

bank-like risks to financial stability (longer-term credit extension based on 

short-term funding and leverage). Such risk creation may take place at an 

entity level but it can also form part of a complex chain of transactions, in 

which leverage and maturity transformation occur in stages, and in ways 

that create multiple forms of feedback into the regulated banking system.11

[emphasis added] 

As the FSB sees it, then, many entities in the shadow banking world work together to produce the maturity transformation that is the risky element of traditional banking. This might seem somewhat dubious as an idea, but former Fed chair 

Ben Bernanke—a strong and persistent backer of regulating shadow banks—tried 

to provide an example of a ‘‘complex chain of transactions’’ in a 2012 speech:

As an illustration of shadow banking at work, consider how an automobile 

loan can be made and funded outside of the banking system. The loan could 

be originated by a finance company that pools it with other loans in a 

securitization vehicle. An investment bank might sell tranches of the 

securitization to investors. The lower-risk tranches could be purchased by 

an asset-backed commercial paper (ABCP) conduit that, in turn, funds itself 

by issuing commercial paper that is purchased by money market funds.12

The problem with this, Bernanke went on, is that ‘‘Although the shadow banking 

system taken as a whole performs traditional banking functions, including credit 

intermediation and maturity transformation, unlike banks, it cannot rely on the 

protections afforded by deposit insurance and access to the Federal Reserve’s discount window to help insure its stability.’’

Thus, to the extent that Bernanke’s views reflect the underlying ideas circulating 

in the FSB—a good bet given the importance of the Fed in the world’s financial system—the effort to control shadow banking is based on the idea that while it can 

create risky maturity transformation it does not have the necessary access to either 

deposit insurance or the Fed’s discount window, both of which supposedly would 

protect shadow banks against runs or other instability. It follows that the risks 

taken by unregulated participants in the capital markets can only be mitigated by 

access to a bank-like Government safety net—and absent these protections must be 

modulated by strict prudential regulation. Of course, access to a bank-like safety 

net, as the President of the New York Federal Reserve Bank has noted, ‘‘would entail substantial prudential regulation of entities—such as broker-dealers—that 

might gain access . . . [since this would be] required to mitigate moral hazard problems.’’13 Thus, more regulation begets more risks for the taxpayers, and more reguVerDate 0ct 09 2002 11:57 Dec 20, 2016 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6621 L:\HE3E8B~1\07-08T~1.REG\HEARING\97398.TXT SHERYL

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14 Bloomberg transcript.

lation after that to protect the taxpayers from the risks the regulators failed to foresee the first time. 

Pursuing this idea, the FSB is developing a theory that would allow regulators 

in member countries to impose prudential regulations on capital markets firms. The 

basis for this regulation is the claim that ‘‘complex chains of transactions’’ can create risks to market stability that are similar to the risks created by maturity transformation. 

The Fed’s pursuit of shadow banking 

There is no doubt that the Fed is an active partner of the FSB, maybe even the 

driving force in the effort to gain some control of shadow banking. 

In remarks at a meeting in New York on December 2, 2014, Stanley Fischer, the 

Fed’s vice chair who also heads an internal systemic risk committee at the agency, 

described the Fed’s then-current effort to control shadow banking. To the extent 

that the Fed itself does not have the authority to exert this control, he said that 

the Fed intends to use the authorities of the FSOC for this purpose. 

At the meeting, Fischer was interviewed by Larry Fink, chairman of BlackRock, 

one of the largest asset-management firms in the world. According to a transcript 

of the interview, Fischer was asked by a member of the audience: ‘‘Stan, can you 

talk a little bit more about the shadow banking system and what, if anything, you 

think should be done at a policy level to ensure that there is the financial stability 

over this 80 percent that you don’t—you have less control over?’’

Fischer responded:

FISCHER: Well, the—you know, there are real institutions—in the shadow 

banking system. There are hedge funds. There are insurance funds.

FINK: Even asset managers.

(LAUGHTER)

FISCHER: Even asset managers, I’ve been reliably informed.

(LAUGHTER)

And other financial institutions, some of those have regulators. The insurance companies, for instance, have regulation. Others do not have—have 

regulation. And what is being done right now is mapping out this system. 

One of the most complicated maps you’ve ever seen was produced in the 

New York Fed showing the shadow banking system and the interactions between it and, you know, everybody is talking to everybody else, doing business with everybody else, it’s to understand that [sic] that system is as a 

system, how it interacts with the banking system, and who has any authority that will enable them to take action—undertake actions to deal with a 

firm, which is if it’s large enough or interconnected enough, would create 

a big problem if it failed.

That’s what we’re doing now. And then, if it’s—if we the Fed have the authority to regulate it. Then on the basis of that analysis, we would then go 

ahead, if we have the authority—for instance, we have control over margin 

requirements—and if we don’t, then it goes to the FSOC and is discussed 

there.14

The identity between the work of the FSB and the work of the Fed on shadow banking is nowhere better exemplified than in a statement by Mr. 

Fischer to a banking audience at a conference sponsored by the Federal Reserve Bank of Atlanta in March 2015:

[N]onbank intermediation often involves complex chains of activity encompassing many entities and markets. Such chains tend to increase the web 

of interconnections in the financial system that, in some circumstances, can 

increase the likelihood or severity of systemic stress . . . It is often said 

that stronger regulation of the banking sector will cause activity to move 

outside the perimeter of regulation. The evolution also could lead to greater 

complexity, such as longer chains of interconnection, which make it more 

difficult for market participants to understand the risks arising from their 

exposures. Examples of migration that have already occurred include the 

movement of many loans made to large corporations from banks to 


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15Stanley Fischer, ‘‘Nonbank Financial Intermediation, Financial Stability, and the Road Forward,’’ Remarks at Central Banking in the Shadows: Monetary Policy and Financial Stability 

Postcrisis, Federal Reserve Bank of Atlanta, March 30, 2015. [emphasis supplied] 16FSB, ‘‘Global systemically important insurers (G–SIIs) and the policy measures that will 

apply to them’’ July 18, 2013, http://www.financialstabilityboard.org/wp-content/uploads/

rl130718.pdf?pagelmoved=1. 17FSOC, U.S. Department of the Treasury, Designations, Feb. 4, 2015, http://

www.treasury.gov/initiatives/fsoc/designations/Pages/default.aspx. 18See transcript of Hensarling/Lew exchange, March 25, 2015. http://www.aei.org/publication/exchange-between-rep-jeb-hensarling-and-treasury-secretary-jacob-lew/?utmlsource=para

mount&utmlmedium=email&utmlcampaign=wallison-kupiec-newsletter.

collateralized loan obligations, the securitization of many credit card receivables, and the securitization of mortgages.15 [emphasis supplied] 

Although the FSB’s ‘‘complex chains of transactions’’—a way of describing the 

shadow banking system—became ‘‘complex chains of activity’’ in Mr. Fischer’s telling, the concept is the same. The use of the term ‘‘activity,’’ as we will see, ties it 

more closely to the relevant Dodd-Frank language. In both cases, these unregulated 

complex chains are seen as increasing risks in the markets, and the migration of 

lending from banks to nonbank financial intermediation—‘‘regulatory arbitrage’’ to 

bank regulators, but in fact the inevitable outcome of greater efficiency—is an example of the problem the Fed and the other bank regulators are facing. 

The FSB’s influence on SIFI designations 

The way the FSOC has exercised its designation authority suggests that it is also 

cooperating with, if not leading, the FSB’s efforts. In any event, the FSOC has been 

implementing the FSB’s decisions in the United States. When Congress authorized 

the FSOC to designate large nonbank financial firms as SIFIs, it assumed that the 

FSOC would follow a fair, objective, and fact-based process in exercising that authority. Although officials have asserted that the FSOC’s designation decisions have 

been the result of such a process, that is not supported by the facts. 

The Treasury and the Federal Reserve Board are unquestionably the most important and influential members of the FSOC—the Treasury because the secretary of 

the Treasury is the chair of the FSOC and the Fed because it is by far the most 

powerful and well-resourced U.S. financial regulator, especially after the extraordinary authorities it received in Dodd-Frank. Both the Treasury and the Fed are 

also members of the FSB, and it is reasonable to assume, given the importance of 

the U.S. financial system, that the Treasury and the Fed are the most important 

and influential members of the FSB. 

After receiving this mandate from the G–20 in 2009, the FSB determined to proceed by designating certain firms as ‘‘global SIFIs,’’ and on July 18, 2013, it designated nine large international insurers—including three large U.S. insurers, AIG, 

Prudential and MetLife—as global systemically important insurers, or G–SIIs.16 The 

FSOC had designated AIG as a SIFI before the FSB had made its designations, but 

Prudential was not designated as a SIFI until September 2013 and MetLife not 

until December 2014.17

The designation of SIFIs by the FSOC is what is called a quasi-judicial proceeding, where evidence is weighed against a statutory standard of some kind, and 

an administrative agency applies the standard to a single party, as a court—based 

on evidence—would apply the law to a single defendant. Quasi-judicial proceedings 

are usually expected to meet certain standards of fairness and objectivity. This fairness and objectivity was missing in the FSOC’s treatment of at least two of the U.S. 

insurers designated as G–SIIs by the FSB. 

In March testimony before the House Financial Services Committee, Treasury 

Secretary Lew stated that the FSB ‘‘acts by consensus.’’18 A consensus literally 

means an agreement; synonyms of consensus in most dictionaries are concurrence, 

harmony, accord, unity and unanimity. So when these three firms were designated 

by the FSB as G–SIIs the Treasury and the Fed necessarily concurred in the decision. 

This means that months before the FSOC designated Prudential or MetLife as 

SIFIs the Treasury, the Fed and the chair of the SEC—the three most important 

members of the FSOC and perhaps the FSB as well—had already determined as 

members of the FSB to designate Prudential and MetLife as G–SIIs. Obviously, if 

a firm is a G–SII on a global scale, it is going to be a SIFI in its home country. 

Thus, whatever process the FSOC might have followed in the designation of Prudential and MetLife, it could not be considered fair, objective and evidence-based if the 

chairman of the FSOC, the Fed and the SEC—as members of the FSB—had already 

decided the issue months before. 


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19MetLife Brief, p46–7; https://www.metlife.com/sifiupdate/important-updates/index.html

?WT.ac=GNlsifiupdatelimportant-updates. 20MetLife Brief, p52. 21Mark Carney, Memorandum to G20 Finance Ministers and Central Bank Governors, February 4, 2015, http://www.financialstabilityboard.org/wp-content/uploads/FSB-Chair-letter-toG20-February-2015.pdf.

Moreover, the FSB has not explained the basis for its designations of Prudential 

and MetLife, except to say that they were made in conformity with a methodology 

of the International Association of Insurance Supervisors. Although the methodology 

was made public, the FSB has never explained how the methodology applied to any 

of the insurers, including the three U.S. insurers. So the need for an objective evidence-based decisionmaking process could not be cured in any way by whatever 

process the FSB may have followed in making its designations. 

Clearly, then, the FSOC’s tainted designations of Prudential and MetLife cannot 

be considered the kind of deliberative process that was sanctioned by Congress 

when it authorized the FSOC to make SIFI designations. 

Finally, there is now reason to believe that the FSOC’s designation of MetLife was 

not the result of an objective study of evidence. In 2015, as part of its legal challenge to the FSOC’s designation, MetLife filed a brief that, for the first time, made 

publicly available the evidence that FSOC had produced to support its position. The 

brief showed that FSOC does not have any significant evidence that MetLife’s financial distress or failure would cause financial instability in the United States. 

In the regulations it adopted to implement the designation process, the FSOC outlined two principal ways that the distress or failure of a firm could cause instability 

in the financial system as a whole: by causing losses to others financially exposed 

to the failing firm (called the Exposure Channel) or through a ‘‘fire sale’’ liquidation 

of assets that drives down asset prices and thus weakens other firms holding the 

same assets (the Liquidation Channel). 

MetLife’s brief demolishes the factual underpinnings of both ideas. 

In addressing Exposure Channel, MetLife submitted evidence that showed other 

major firms had very small exposures to MetLife. For example, in the unlikely event 

that the largest U.S. banks were to lose 100 percent of their exposure to MetLife, 

that loss would not exceed 2 percent of their capital. In a point that would be funny 

if weren’t so serious, MetLife showed that the fines recently levied on the largest 

U.S. banks by the Justice Department were four times larger than the biggest loss 

that any large bank would suffer in a total MetLife collapse, yet these fines had 

no observable effect on the health of the banks involved.19

With respect to the Liquidation Channel, a study done for MetLife by Oliver 

Wyman showed that even in the implausible event that all policyholders were to 

surrender their policies and ask for return of their cash values—and all other 

MetLife liabilities that could accelerate would immediately become due—the firm 

could still liquidate enough assets to cover its liabilities ‘‘without causing price impacts that would substantially disrupt financial markets.’’20 According to the brief, 

the FSOC produced no data to contradict this evidence, but summarily asserted that 

these assets sales ‘‘could’’ have an adverse effect on the broader economy. 

These facts raise the question of why FSOC chose to designate MetLife. Although 

the actions of the FSOC have consistently mirrored the decisions of the FSB, including the designation of the same three insurers, the FSOC has always denied that 

these decisions were in any way related to or compelled by similar decisions of the 

FSB. However, the designation of MetLife with so little evidence of its systemic importance adds weight to the idea that the FSOC is simply following the directives 

of the FSB. 

There is also evidence that the FSB, as well as the Treasury and the Fed, believe 

they, as members of the FSB, are bound by FSB decisions. In early February, 2015, 

Mark Carney, the chairman of the FSB, sent a memorandum to FSB members, notifying them that the FSB considered them to be bound by its decisions. Because of 

the importance of the United States as a member of the FSB, it is highly unlikely 

that the FSB chairman would have sent this memorandum without the prior agreement of the Treasury and the Fed. 

The memorandum noted peremptorily that the FSB expects ‘‘full, consistent and 

prompt implementation of [its] agreed reforms.’’21 This sounds like the FSB’s decisions are binding, but when questioned about this by Chairman Jeb Hensarling at 

the HFSC’s March hearing, Treasury Secretary Lew denied that the United States 

was bound by these ‘‘agreed reforms.’’ Hensarling pointed out that the FSB had recently ‘‘exempted’’ three Chinese banks from the reforms and asked ‘‘if these are 

preliminary suggestions and not rules [by the FSB] why is it that the FSB found 


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22See transcript, note 15 above. See also, Peter J. Wallison and Daniel M. Gallagher, ‘‘How 

Foreigners Became America’s Financial Regulators,’’ The Wall Street Journal, March 19, 2015. 23Letter dated June 20, 2014, to Scott Garrett, chair of the HFSC subcommittee on Capital 

Markets and Government-Sponsored Enterprises, p2. 24S. Roy Woodall, Testimony Before the Senate Banking Committee, April 28, 2015, p5. 

it necessary to grant exemptions, specifically to the Chinese?’’ Secretary Lew had 

no answer to this question at the hearing.22

If in fact the FSOC, the Treasury and the Fed are committed to the idea that 

FSB members are bound by FSB decisions, there is a further reason for seeing the 

FSOC’s designation of Prudential and MetLife as illegitimate. The designation decision was in effect made by the FSB and not the FSOC. 

In a June 2014 letter to Congressman Scott Garrett, chair of a HFSC subcommittee, the Treasury secretary and the chairs of the Fed and the SEC denied 

that FSB designation decisions are binding on the United States: ‘‘The identification 

of a firm as a G–SIFI does not have legal effect in the United States or any other 

country; rather, any action to implement heightened supervision of an identified G–

SIFI within a particular country would need to be taken by that country pursuant 

to its own laws.’’23

However, the notion that United States is not obliged to follow FSB decisions is 

questionable in light of Treasury Secretary Lew’s description—in the same March 

25 HFSC hearing—of the purpose of the United States involvement in the work of 

the FSB. When asked by Chairman Hensarling whether FSB decisions were binding 

on the United States, the secretary replied: ‘‘We work in the FSB to try to get the 

kinds of standards that we think are appropriate in the United States to be adopted 

around the world so that the whole world will have high standards.’’ Clearly, if that 

is the Obama administration’s purpose, it must itself accept and be bound by the 

FSB’s decisions; if the United States isn’t bound, the effort to get others to comply 

will never be successful. So Secretary Lew, at least, seems to be operating under 

the assumption that the FSB’s decisions will eventually be imported into and adopted by the United States. 

In this connection, it is important to recall that the FSB’s authority ultimately 

derives from the G–20 leaders. As S. Roy Woodall, the Independent Member Having 

Insurance Expertise on the FSOC noted in testimony before this Committee in April 

2015: ‘‘[I]nternational agreements and commitments made by the U.S. members of 

the FSB . . . are commitments made under the auspices of the G–20. As such, they 

carry considerable weight. Although it is true that they are not legally binding, such 

commitments are expected to be implemented as part of the G–20’s regulatory reform agenda.’’24 President Obama was a member of the G–20 when it directed the 

FSB to regulate shadow banks, and all the voting members of the FSOC are political appointees of President Obama. It is a small step in logic for the members of 

the FSOC—all of whom are appointees of President Obama—to believe that in following the directions of the FSB they believe they are carrying out the President’s 

own policies. 

Thus, while the FSB’s decisions have no direct legal effect in the United States, 

it seems that the U.S. members of the FSB believe that they have sufficient authority to agree to the FSB’s decisions and impose them in the United States. Whether 

they actually have that authority is covered in the next section. 

Do the FSOC and other U.S. agencies have authority to implement FSB directives? 

If, as Secretary Lew avers, the Obama administration is using the FSB as a 

mechanism for raising ‘‘global standards’’ to a level that ‘‘we think are appropriate 

in the United States,’’ this must mean that the Treasury and the Fed believe they 

have the authority to do in the United States what they are attempting to get the 

FSB to prescribe for all other FSB members. 

Where is this authority? 

Although the Dodd-Frank Act clearly provides authority for regulating entities

that are deemed to be systemically important, the authority for regulating ‘‘complex 

chains of transactions’’ is not as clear. Yet, by concurring with—if not actually sponsoring—the FSB’s idea that ‘‘complex chains of transactions’’ should be regulated in 

order to control the dangers of shadow banking, it is apparent that the Treasury 

and the Fed believe that they would have the power to regulate those transactions 

when the directive from the FSB instructs them to do so. 

Indeed, a concept similar to ‘‘complex chains of transactions’’ has already been articulated by the FSOC, while using a slightly different form of words. In its December 18, 2014, Notice on Asset Management Products and Activities, the FSOC statVerDate 0ct 09 2002 11:57 Dec 20, 2016 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6621 L:\HE3E8B~1\07-08T~1.REG\HEARING\97398.TXT SHERYL

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25FSOC, ‘‘Notice on Asset Management Products and Activities,’’ December 18, 2014, p4. 26The historical record does not support these claims. When Lehman Brothers failed—from 

the market’s perspective suddenly and without a Government rescue in September 2008—it did 

not drag down any other significant financial firm, even though Lehman was one of the largest 

nonbank financial institutions in the United States. There was certainly chaos after Lehman’s 

bankruptcy, but that was because the Government suddenly reversed the policy of rescuing 

large financial firms that it appeared to have established 6 month earlier with the rescue of 

Bear Stearns. This reversal completely upended the expectations of market participants, creating a panic in which institutions and investors sought and hoarded cash. The draining of liquidity from the financial system after the Lehman bankruptcy is what we now know as the 

financial crisis. 27Peter J. Wallison, ‘‘The Regulators’ War on Shadow Banking,’’ AEI Research, January 22, 

2015. http://www.aei.org/publication/regulators-war-shadow-banking/.

ed: ‘‘risks to financial stability might not flow from the actions of any one entity, 

but could arise collectively across market participants.’’25 [emphasis supplied] 

Most of the attention to the FSOC’s designation of SIFIs has focused on the agency’s efforts to designate large financial institutions which, if they become financially 

distressed, could cause instability in the U.S. financial system. The underlying idea 

here is that, because of its interconnections with other firms, the financial distress 

or failure of a nonbank firm could drag down others, causing the financial instability that the Act is intended to prevent.26

However, the FSOC’s authority is not limited to designating SIFIs because their 

financial distress could cause instability in the U.S. financial system. It also has authority to designate as SIFIs—and consign to regulation by the Fed—many firms 

that are not large and whose failure alone would not cause financial instability. For 

example, Sec 113(a) of Dodd-Frank states:

The Council . . . may determine that a U.S. nonbank financial company 

shall be supervised by the Board of Governors and shall be subject to prudential standards . . . if the Council determines that material financial distress at the U.S. nonbank financial company, or the nature, scope, size, 

scale, concentration, interconnectedness, or mix of activities of the U.S. 

nonbank financial company, could pose a threat to the financial stability of 

the United States. [emphasis supplied]

In addition, Sec. 112(a)(2)(H) describes the duties of the FSOC as follows:

[R]equire supervision by the Board of Governors for nonbank financial companies that may pose risks to the financial stability of the United States 

in the event of their material financial distress or failure, or because of their 

activities pursuant to section 113; [emphasis supplied]

Finally, Sec. 120 provides that

The Council may provide for more stringent regulation of a financial activity by issuing recommendations to the primary financial regulatory agencies 

to apply new or heightened standards and safeguards, including standards 

enumerated in section 115, for a financial activity or practice conducted by 

bank holding companies or nonbank financial companies under their respective jurisdictions, if the Council determines that the conduct, scope, nature, 

size, scale, concentration, or interconnectedness of such activity or practice 

could create or increase the risk of significant liquidity, credit, or other 

problems spreading among bank holding companies and nonbank financial 

companies, financial markets of the United States, or low-income, minority, 

or underserved communities.

Finally, under Title VIII of Dodd-Frank, the Fed, with the approval of the FSOC, 

has authority to impose ‘‘risk management standards’’—these are undefined—on 

any financial firm engaged in payment, clearance and settlement (PCS) activities. 

These provisions are sometimes seen as applicable only to clearinghouses and other 

financial market utilities, but in fact they are also applicable for financial firms that 

engage in payment, clearing and settlement activities. PCS are very broadly defined 

in Title VIII and could provide another avenue through which the FSOC and the 

Fed could gain prudential controls over the firms that make up the capital markets.27

All of these provisions are important because the FSB and the Fed are both focusing on a ‘‘complex chain of transactions’’—or as the Fed describes it, a ‘‘complex 

chains of activity’’—as a way to describe how the shadow banking system operates. 

The term ‘‘activities’’ could be interpreted to refer to a ‘‘complex chain of transactions’’ and thus provide the Fed and the FSOC with the authority to impose prudential standards on ordinary transactions in the capital markets. 


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28Michigan v. EPA, 576 U.S.l(2015) (slip op., at 4–5) (Thomas, J., concurring). 

Thus, there is a plausible argument based on this language that the FSOC could 

designate as SIFIs all firms that engage in certain defined transactions—say, buying the commercial paper of asset-backed trusts—or participate in those transactions to an extent that exceeds some dollar amount. The danger of being designated for these suspect transactions would be enough to give the Fed the ability 

to approve or disapprove transactions of that kind on a case-by-case basis—a plausible substitute for prudential regulation. 

The FSOC and the Fed would defend their position by arguing that it was transactions like those they are banning that caused the financial crisis. In addition, if 

the FSOC determines that a firm’s activities should be regulated by the Fed under 

Section 112 or 113, the Fed is arguably then the firm’s primary financial regulator 

for purposes of Section 120. 

We don’t know, of course, how the courts will respond to interpretations like 

these. It is a distortion of the statutory language, but the courts often accord deference to agencies’ interpretation of the scope of their statutory authority, especially 

if they believe that the agency is attempting to address a serious problem that is 

within the ‘‘spirit’’ of the legislation. The FSOC and the Fed, in carrying out a mandate of the FSB, could claim that they have authority to take these steps because 

they are attempting to prevent another financial crisis, and no one might be willing—or have the standing—to challenge them. Cases like this suggest the Supreme 

Court—as suggested recently by Justice Thomas, should revisit Chevron.28

If the FSOC and the Fed are successful in controlling what the FSB has now defined as shadow banking—that is asset managers, securities firms, investment 

funds, finance companies and hedge funds, among others—they will succeed in stifling the continued growth of the securities and capital markets in the United 

States, which have been far and away the main sources of financing for U.S. business. 

What to Do 

If this Committee believes that applying prudential regulation to capital markets 

activities should be unacceptable, it should act to prevent this from happening. The 

FSB is not the problem; as noted earlier, it has no legal authority in the United 

States; nor would a G–20 statement or an agreement by U.S. regulators at the FSB 

by itself confer this authority. 

The problem is that there is language in the Dodd-Frank Act that could be interpreted to confer the authority on the FSOC and the Fed to control the so-called 

shadow banking system by imposing prudential regulation on ordinary activities in 

the capital markets. Section 113 of Dodd-Frank refers to ‘‘mix of activities’’ as a 

basis for designation of a SIFI, but it does not refer to the control of chains of transactions or an entity’s participation in chains of transactions or chains of activities. 

In any event, the list of items in Section 113 for which firms can be designated (‘‘nature, scope, size, scale, concentration, interconnectedness, or mix of activities’’) is far 

too broad and contains no inherent limit. Did Congress really intend to give the 

FSOC authority to designate a firm as a SIFI because of its ‘‘nature?’’ If the doctrine 

of unconstitutional delegation of legislative authority were still alive, this would be 

a perfect candidate. Congress should repeal this list. Alternatively, Congress could 

make clear that the term ‘‘activities’’ was not intended to include specific chains of 

transactions, but the best solution would be to remove the term ‘‘activities’’ from the 

Act. 

Conclusion 

Complacency about what the FSB, the FSOC and the Fed are doing to control 

shadow banking is not only unwarranted, it is a grave danger to U.S. economic 

growth. ‘‘Shadow banks,’’ as these agencies conceive it, are the firms active in the 

capital markets in the United States. The freedom of these firms to take the risks 

their managements find acceptable is the foundation of the innovative and efficient 

financial system that has made the U.S. economy the world’s unquestioned leader. 

The financial crisis may have given bank regulators new powers that they can use 

to impose prudential controls on capital market firms. Indeed, several provisions of 

the Dodd-Frank Act could be creatively interpreted to provide the legal authority 

to do so. If this Committee agrees that bank—like prudential controls over the capital markets would be harmful to economic growth, it should take steps today to cutoff the legal authorities on which these agencies are likely to rely.


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1 I am grateful to the Alfred P. Sloan Foundation for its support of my research on global financial stability, and to my colleagues Morris Goldstein, Simon Johnson, Avinash Persaud, 

Edwin Truman, and Nicolas Veron for their suggestions for this specific submission of testimony. I remain solely responsible for the views and any errors in this statement, and thus it 

does not necessarily represent the views of the Peterson Institute, the Sloan Foundation, or any 

member of their staff or boards. Disclosure of the Institute’s funders and transparency policy 

are available at http://www.piie.com/content/?ID=138.

PREPARED STATEMENT OF ADAM S. POSEN

PRESIDENT, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS1

JULY 8, 2015

1. The rationale for international financial regulatory coordination at 

this time—Generally, the U.S. Government has the lead in international economic 

negotiations—as the largest and most developed economy, as the incumbent creator 

of the rules and institutions started after World War II, often as having the most 

technical expertise on a given subject, and usually as having the model of a property-rights respecting rule of law in its commercial affairs that other economies wish 

to emulate or import. But even where the U.S. Government is not entirely dominant 

in international policy agenda setting, there is room for the U.S. economy and citizens to benefit from international coordination. The rest of the world economy exists, whether or not the U.S. Government chooses to engage with other governments 

in discussion of the rules by which it is partially governed. Economic activities 

abroad can have significant negative spillovers on U.S. well-being, as well as 

present opportunities for (mutual) gain to be unlocked. Mostly, though not always, 

international economic coordination ends up raising standards abroad while constraining harmful behaviors in the United States that we would wish to limit anyway—and in fact, our own Government’s legislated intent is often more effectively 

applied by making it harder for U.S. entities to skirt domestic regulations by moving abroad. 

The benefits to the U.S. economy and public from international financial regulatory cooperation are particularly high for a simple reason: unnecessary financial 

volatility and misbehavior abroad is transmitted to the U.S. economy directly, rapidly, and strongly. As other economies inevitably grow in size and financial depth 

relative to the U.S. economy, the impacts of their problems on the United States 

grow. We can see this in the comparison between the real but limited impact of the 

Latin and Asian financial crises of the 1990s on the United States and the far greater harms felt from the European crisis of recent years and the swings in capital 

flows and commodity prices driven by Chinese financial instability. This can do us 

great harm, despite the size, depth, diversity, and general robustness of U.S. financial markets and lending activities making us less vulnerable than other economies 

to any given shock. 

We cannot simply live with the misbehaviors and even unintended weaknesses of 

other economies’ financial systems. We need changes in those other countries to defend ourselves, as well as to help them. Furthermore, the usual concern in international economic governance about a race to the bottom of low standards winning 

out takes on a particular form in the financial sector: cross-border regulatory arbitrage. Given the mobility of capital and the availability of information technology 

and connectivity, jurisdictions where regulations are much weaker can become 

places where activities prohibited in the United States and elsewhere thrive. These 

activities can produce globally dangerous buildups of financial risk very quickly and 

easily. While international regulatory coordination cannot rule these out completely, 

it can make it both much more difficult for such legal loopholes to arise, to be defended, to grow in size and riskiness, and to hide from at least supervisory awareness. 

International regulatory coordination, in the manner in which it is currently led 

by U.S. Government and Federal Reserve representatives, is reducing these risks 

to U.S. economic and financial stability. Please note that I said reducing, not removing, these risks—please note, also though, that I said reducing not raising. This reduction of foreign financial risks to the United States (including from U.S. entities 

moving dangerous activities abroad to elude supervision) is happening along four 

channels at present:

• Raising minimum standards for the soundness of major banks and banking systems, including by setting minimums for bank capital, improving risk assessment (e.g., stress testing), creating liquidity/leverage limits, identifying systemically important institutions, making cross-border resolution more feasible, and 

so on.


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• Increasing cross-border transparency of financial systems’ organization, institutions, financial flows, and buildups of risk.

• Reducing the possibilities of regulatory arbitrage across major financial centers, 

both in terms of getting agreement on activities to be restricted and monitored, 

and of providing a means for ‘naming and shaming’ noncompliant regimes.

• Promoting largely U.S.-based versions of best practice for regulators, supervisors, 

bankers, and nonbank financial institutions in other countries.

I would be remiss in my duty to this Committee, however, if I did not point out 

that other countries can legitimately expect better U.S. behavior and practice to 

emerge from international regulatory coordination as well. Our regulators, supervisors, banks, and other financial institutions did not cover themselves in glory with 

their practices in the run-up to the financial crisis of 2008–10. At a minimum, having the U.S. financial regulators and supervisors be confronted with international 

questions and standards should reduce the cognitive capture of that community by 

a set of blinders, as I have argued played a critical role in causing the U.S. financial 

crisis. 

There are other views which will claim that the current international financial 

regulatory process is either eroding desirable U.S. regulations by having other countries force compromise on the United States through the process, or is imposing unnecessary additional regulations upon the United States to erode our competitive 

advantages, or both. I readily acknowledge that there are a few instances of this 

sort—I believe that the attempt by European Union [EU] regulators to impose Solvency II, their set of insurance requirements, on insurers in the United States and 

elsewhere is a particularly costly example, as I will explain—but I view that as indeed instances of bad regulation, not the overall international process being inherently harmful. Any regulatory process, domestic or foreign, will have debates and 

make some mistakes. Arguably, the domestic Financial Stability Oversight Council 

[FSOC] within the United States is if anything primed to be more biased toward 

lowest common denominator or group think leaving gaps in the U.S. financial regulatory framework than the international Financial Stability Board [FSB]. So, the 

FSB is a useful check and occasional corrective to the U.S. FSOC process. 

Whether it is discussions of Trade Promotion Authority (which I commend the 

Senate for recently passing), of responses to climate change, of efforts to balance 

healthy global tax competition with the prevention of tax avoidance by multinational corporations and wealthy individuals, or of the need to prevent cross-border 

regulatory arbitrage by financial institutions, the U.S. Government has to confront 

the fact that behaviors and policies abroad affect us here at home. There is sometimes a paranoid tendency by some American politicians and pundits to assume that 

all international economic deals are about putting one over on the United States, 

eroding our high standards through subversion of domestic regulation, or eroding 

our market-based competitiveness by imposing undue additional regulation. This is 

a profound misunderstanding on both the right and the left of our public debate. 

The United States advances the economic welfare of its people through constructive 

international engagement, usually gets its way in such efforts and extends the rules 

it wants to others, and sometimes even benefits from having constraints imposed 

from outside pressure that domestic special interests would be able to prevent absent that. Yes, sometimes other governments do pursue narrow interests of their national champions, whether State-owned or simply influential private businesses, 

through these processes. But American economic negotiators are grown-ups, they 

can handle it, just as they would when having business negotiations in the private 

sector. The fact that somebody tries something self-interested does not mean you 

cannot work with them, you simply call them on that attempt.

2. The demonstrated utility of the Financial Stability Board—Turning from 

the general issue of international coordination on financial regulation to the current 

process for pursuing it, what about the FSB? Does it serve U.S. and global interests 

as currently constituted and operating? I believe that it clearly does, though with 

some inherent limitations, as well as some areas for improvement that can be fixed. 

I resolutely dispute any claims that the FSB is run amok, is undermining U.S. domestic financial regulation, or is trying to, let alone succeeding in, forcing our diverse and unique private-sector financial system to converge on others’ models. This 

is not because I am part of some technocratic self-appointed elite, or more crassly 

simply buddies with the people involved in the FSB process—I have been rather 

critical on the record of some of the FSB’s decisions for lack of ambition and for too 


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2See, among others, Adam S. Posen, ‘‘Confronting the Reality of Structurally Unprofitable 

Safe Banking,’’ in Too Big to Fail III: Structural Reform Proposals: Should We Break Up the 

Banks?, Andreas Dombret and Patrick Kenadjian, eds., Boston/Munich: De Gruyter, 2015.

http://tinyurl.com/oxc7wk2. 3For an earlier assessment of the FSB, many of whose recommendations have largely since 

been adopted, see Edwin M. Truman and Gary Schinasi, ‘‘Reform of the Global Financial Architecture,’’ PIIE Working Paper 10–14, October 2010, http://www.piie.com/publications/interstitial.cfm?ResearchID=1674. 4 I am grateful to Morris Goldstein for this insight regarding the G20 link.

5Which matters if you believe that resolution threats are credible to large/important institutions, and that inability to resolve Lehman Brothers and others was a cause of the financial 

crisis. I have my doubts this is going to help much in preventing the next crisis. For this hearing, however, the point is that the majority of U.S. officials do believe this is important, and 

the FSB has delivered in response to their belief some global adoption of measures desired in 

this regard. 

much clubbiness in its agenda setting.2 But I do believe that the FSB as an organization for international coordination is a reasonably good institutional response to 

the need for effective, legitimate, and well-motivated global financial regulation.3

Among the positive attributes of the FSB are: 

• Its national membership covers all of the world’s major financial centers but is 

still limited enough in number to be able to make decisions.

• It usefully cuts across national and regulatory turf barriers in a way that is 

needed to confront regulatory arbitrage and address globally connected financial 

networks.

• It is coordinated with the G20 economic leaders’ meetings and processes, which 

means major agenda items from the FSB get on to the G20 agenda for buy-in.4

• This also creates scrutiny and oversight for the G20 decisions, and a structure 

for issuing public progress reports for assessment.

• By including central bankers and financial officials, as well as bank supervisors 

narrowly defined, it avoids some of the narrow thinking and silo mentality that 

caused cognitive capture in the earlier Basel banking processes and in U.S. supervisory decisions pre-crisis.

• It is a soft-law organization, meaning that agreements it reaches are only binding on member governments to the degree that not complying involves naming 

and shaming

• When a regulation issued becomes recognized as worthy, popular and market 

pressure to adopt a good standard are the main source of compliance, with 

the FSB simply providing public benchmarks and monitoring.

• This to me is a virtue in a world of sovereign nation states and the need to 

change regulations over time.

• It has grown out of leadership efforts by both Democratic and Republican administrations, including the creation of its direct predecessor the Financial Stability Forum, and as such is at its core a U.S.-instigated nonpartisan institution.

The proof is in the pudding, even though it has had little time to cook. The FSB 

process has produced some useful achievements that are being applied globally as 

a result of these structural attributes. Banking transparency, standards, and particularly capital requirements have been raised in the major financial institutions 

of a wide range of countries, including in some critical emerging markets and some 

financial centers outside of the United States and European Union. Agreement on 

a set of G–SIFIs, globally systemically important financial institutions, and on capital surcharges for them as partial insurance for the public, has been mutual including all FSB member countries, and done on largely sound replicable criteria. 

Progress has been made on procedures and compelling conditional funding for safer 

expedited resolution of such important institutions when they run into trouble.5

Having widespread divergence on what different governments believe is adequate 

bank capital or what banks are systemically important would be a recipe for precisely the kind of race to the bottom that would imperil U.S. financial stability—

every country would get looser regulations for its preferred client banks, and some 

would compete to be the place the world’s banks could engage in activities that 

should not be allowed. This will become increasingly important with large Chinese 

financial institutions, as we are seeing in today’s news. Given China’s membership 

in the FSB and G20, we have a means to bring those potential dangers into the 

regulatory system beyond Chinese government bailouts and own soft-touch regulation (following the United States and United Kingdom mistakes of the 2000s, sadly).


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6See Adam S. Posen, ‘‘Why is Their Recovery Better than Ours?,’’ speech at the National Institute for Economic and Social Research, London, 27 March 2012, available at http://

www.bankofengland.co.uk/publications/Documents/speeches/2012/speech560.pdf. 7 Avinash D. Persaud, How Not to Regulate Insurance Markets: The Risks and Dangers of Solvency II, PIIE Policy Brief 15–5, April 2015, http://www.piie.com/publications/interstitial.cfm?ResearchID=2777.

3. Where and why bad regulation is emerging from the FSB process regarding nonbanks—As I mentioned earlier, the FSB can be a good process, producing some good international standards as a result, thus serving U.S. economic 

interests, and still get some things wrong. This is inevitable, as getting things right 

is difficult, both because there are governments pushing compromises and proposals 

for the wrong reasons on any given issue, and because some issues are more difficult 

to tackle than others. Where the FSB at present is getting things wrong, in my 

opinion, largely has to do with its approaches to coordinating regulation of the 

nonbank parts of the financial system. Regulating nonbanks is more difficult because some well-organized interest groups that were less weakened or tainted by 

the financial crisis have some sway, because intellectually the manner and extent 

of nonbank regulation is less obvious and certainly less well precedented, and because the kinds of national regulators and supervisors involved are much more diverse. I also believe that the FSB has demonstrated a tendency to treat nonbanks 

as banks because it is something its technocratic members are more familiar with, 

it allows claims of neutrality across the financial sector, it utilizes off-the-shelf remedies, and it speeds the conclusion of the post-crisis agenda. In other words, treating 

banks and nonbanks largely the same is the easy way out. 

Diversity in financial systems is, however, a virtue. As I have argued for some 

time, a major reason that the United States and Germany recovered from the financial crisis more rapidly and strongly than other advanced economies was that they 

had more diversified financial systems, and thus were more robust in continuing to 

provide financing to nonfinancial business and households.6 This financial diversity 

so helpful to the United States comes along at least two dimensions: first, that we 

have a relatively unconcentrated banking system, despite the existence of 

megabanks, which includes community banks and various regional lenders; second, 

that we have a variety of nonbank means of providing finance for investment, including corporate and junk bonds and commercial paper, venture capital and private 

equity, pension funds and insurance firms, as well as newly emerging forms of direct lending. This makes the U.S. economy far more resilient to financial shocks, 

even the worst ones we have seen. We do not want any global regulatory process 

to interfere with this diversity in U.S. finance. 

That is not the same, though, as saying any international regulation of nonbanks 

is a bad thing. If one remembers all the different kinds of financial firms engaged 

in bad lending and investment decisions, fraudulent behavior, speculation with 

other people’s money, and reliance on implicit government bailout guarantees, during the 2000s in the United States, there is a prima facie case which I support for 

more entities coming under regulation than fewer. What the FSB needs to do, and 

the U.S. representatives there need to encourage, is serious discussion of which

parts of the nonbank financial sector need further regulation, and which do not, and 

what form that regulation should take. Simply amping up capital requirements, for 

holding ‘‘safe assets,’’ and calling everything a ‘‘shadow bank’’ that provides funding 

and is not a bank, misses the point and potentially does harm. 

Right now, the biggest mistake the FSB is making in this regard is in the attempt 

to extend Solvency II, the European Commission’s regulation for insurance firms, 

to global application. This is a bad idea for European insurers on its own lack of 

merits—as argued by my colleague Avinash Persaud, long-term investors like life 

insurers with clear payout obligations need a very different approach to their portfolios than do asset managers or banks, and what constitutes safe investment for 

them is different than for banks.7 Insurers certainly need regulation and supervision, including clear capitalization to meet their policyholders’ expected payouts. 

But almost every jurisdiction, and certainly the U.S. states, already provides such 

pure protective supervision. Solvency II tries to add on capital holding requirements 

of Government bonds and short-term assets akin to what is (rightly) required for 

banks. This is not only ill-suited for insurers, it is likely to result in a short-fall of 

private funds for long-term investment like infrastructure in the jurisdictions that 

adopt this set of requirements—where those investment funds for the long-term are 

desperately needed. 

This bad outcome from the FSB illustrates what happens when the United States 

goes into international processes with its own house not in order. We have 54 State 

and other local insurance commissioners, and despite the addition of a Federal overVerDate 0ct 09 2002 11:57 Dec 20, 2016 Jkt 000000 PO 00000 Frm 00095 Fmt 6633 Sfmt 6621 L:\HE3E8B~1\07-08T~1.REG\HEARING\97398.TXT SHERYL

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sight, no real one representative to strongly present in the FSB. Meanwhile, the

European Union has a coherent Commission point of view on this, which has huge 

bureaucratic momentum after years of preparation centrally. The insurers in Europe for the most part rightly hate it, but since it seems inevitable to be imposed 

on them, they have given up fighting Solvency II, and instead back using the FSB 

to impose it on the United States, Japanese, and other competing insurers. They 

figure if they will be limited, they want to be sure their global competitors are as 

well. The United States needs to stand up against this in the FSB. This is the exception that proves the general rule that the FSB process serves U.S. interests, but 

it reflects an instance of bad regulation, not an overall assault on U.S. financial

diversity. And it should be responded to as such within the FSB process.


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ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

PREPARED STATEMENT OF MICHAEL S. BARR

THE ROY F. AND JEAN HUMPHREY PROFFITT PROFESSOR OF LAW

UNIVERSITY OF MICHIGAN LAW SCHOOL

JULY 8, 2015

In 2008, the United States plunged into a severe financial crisis that shuttered 

American businesses, and cost millions of households their jobs, their homes and 

their livelihoods. The crisis was rooted in years of unconstrained excesses and prolonged complacency in major financial capitals around the globe. The crisis demanded a strong regulatory response in the United States and globally as well as 

fundamental changes in financial institution management and oversight worldwide. 

The United States has led these reforms, both domestically and internationally. 

In the United States, the Dodd-Frank Act created the authority to regulate Wall 

Street firms that pose a threat to financial stability, without regard to their corporate form, and to bring shadow banking into the daylight; to wind down major 

firms in the event of a crisis, without feeding a panic or putting taxpayers on the 

hook; to attack regulatory arbitrage, restrict risky activities through the Volcker 

Rule and other measures, regulate repo and other short-term funding markets, and 

beef up banking supervision and increase capital; to require central clearing and exchange trading of standardized derivatives, and capital, margin and transparency 

throughout the derivatives market; to regulate payments, settlement, clearance and 

other systemic activities; to improve investor protections; and to establish a new 

Consumer Financial Protection Bureau to look out for the interests of American 

households. 

The Act established the Financial Stability Oversight Council with authority to 

designate systemically important firms and financial market utilities for heightened 

prudential oversight by the Federal Reserve; to recommend that member agencies 

put in place higher prudential standards when warranted; and to look out for and 

respond to risks across the financial system. The Council is aided in these tasks by 

its own staff, the staff of member agencies, and the independent Office of Financial 

Research, which has a duty to standardize and collect data and to examine risks 

across the financial system. 

One of the major problems in the lead up to the financial crisis was that there 

was not a single, uniform system of supervision and capital rules for major financial 

institutions. The Federal financial regulatory system that existed prior to the

Dodd-Frank Act developed in the context of the banking system of the 1930s. Major 

financial firms were regulated according to their formal labels—as banks, thrifts, investment banks, insurance companies, and the like—rather than according to what 

they actually did. An entity that called itself a ‘‘bank,’’ for example, faced tougher 

regulation, more stringent capital requirements, and more robust supervision than 

one that called itself an ‘‘investment bank.’’ Risk migrated to the less well-regulated 

parts of the system, and leverage grew to dangerous levels. 

The designation of systemically important nonbank financial institutions is a cornerstone of the Dodd-Frank Act. A key goal of reform was to create a system of supervision that ensured that if an institution posed a risk to the financial system, 

it would be regulated, supervised, and have capital requirements that reflected its 

risk, regardless of its corporate form. To do this, the Dodd-Frank Act established 

a process through which the largest, riskiest, and most interconnected financial 

firms could be designated as systemically important financial institutions and then 

supervised regulated by the Federal Reserve. The Council has developed detailed

interpretive guidance and a hearing process that goes beyond the procedural requirements of the Act, including extensive engagement with the affected firms, to 

implement the designation process outlined in Dodd-Frank. The approach provides 

for a sound deliberative process; protection of confidential and proprietary information; and meaningful and timely participation by affected firms. The Council has

already designated a number of firms under this authority. 

Critics of designation contend that it fosters ‘‘too big to fail,’’ but the opposite is 

true. Regulating systemically important firms reduces the risk that failure of such 

a firm could destabilize the financial system and harm the real economy. It provides 

for robust supervision and capital requirements, to reduce the risks of failure, and 

it provides for a mechanism to wind down such a firm in the event of crisis, without 

exposing taxpayers or the real economy to the risks of their failure. The FDIC is 

developing a ‘‘single point of entry’’ model for resolution that would allow it to wind 

down a complex financial conglomerate through its holding company with


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1See Michael S. Barr, Who’s in Charge of Global Finance?, Georgetown Journal of International Affairs. 

‘‘resolution-ready’’ debt and equity, while permitting solvent subsidiaries to continue 

to operate. Similar approaches are being developed globally. 

Other critics argue that the FSOC should be more beholden to the regulatory 

agencies that are its members, but again, the opposite is true: Congress wisely provided for its voting members, all of whom are confirmed by the Senate, to participate based on their individual assessments of risks in the financial system, not 

based on the position of their individual agencies, however comprised. 

Members must also individually attest to their assessments in the FSOC’s annual 

reports. The FSOC, moreover, has the duty to call on member agencies to raise their 

prudential standards when appropriate, and member agencies must respond publicly and report to Congress if they fail to act. If anything, the FSOC’s powers 

should be strengthened, so that fragmentation in the financial regulatory system 

does not expose the United States to enormous risk, as it did in the past. 

Some critics contend that certain types of firms in certain industries or over certain sizes should be categorically walled off from heightened prudential supervision, 

but such steps will expose the United States to the very risks we faced in the lead 

up to the last devastating crisis. The failure of firms of diverse types and diverse 

sizes at many points in even very recent memory—from Lehman and AIG to LongTerm Capital Management—suggest that blindspots in the system should at the 

very least not be intentionally chosen in advance by the Congress. The way to deal 

with the diversity of sizes and types of institutions that might be subject to supervision by the Federal Reserve is to develop regulation, oversight and capital requirements that are graduated and tailored to the types of risks that such firms might 

pose to the financial system, as the agencies have been doing. FSOC and member 

agencies also have other regulatory tools available with respect to risks in the system for firms not designated for Fed supervision, including increased data collection 

and transparency, collateral and margin rules for transactions, operational and client safeguards, risk management standards, capital requirements, or other measures. Some critics complain that the FSOC’s work is too tied to global reforms by bodies 

such as the Financial Stability Board (FSB). But global coordination is essential to 

making the financial system safe for the United States, as well as the global economy. The United States has led the way on global reforms, including robust capital 

rules, regulation of derivatives, and effective resolution authorities. These global efforts, including designations by the FSB, are not binding on the United States. 

Rather, the FSOC, and U.S. regulators, make independent regulatory judgments 

about domestic implementation based on U.S. law. And U.S. regulators follow the 

normal notice and comment process when developing financial regulations. The FSB 

itself has become more transparent over time, adopting notice and comment procedures, for example, but it could do more to put in the place the kind of protections 

that the FSOC has established domestically.1

As with designation, global coordination—and independent regulatory judgment—

is essential to capital rules. Strong capital rules are one key to a safer system. 

There’s already double the amount of capital in the major U.S. firms than there was 

in the lead up to the financial crisis. Globally, regulators are developing more stringent risk-based standards and leverage caps for all financial institutions, and tougher rules for the biggest players. In the United States, regulators have proposed even 

stronger leverage and capital requirements for the largest U.S. firms, and other 

countries are putting in place stricter approaches when warranted by their local circumstances. 

In my judgment, the local variation based on a strong minimum standard is 

healthy for the system, taking into account the different relative size of financial 

sectors and differing local economic circumstances. There’s been progress on the 

quality of capital—focusing on common equity—and on better and more comparable 

measures of the riskiness of assets, but more could be done to improve transparency 

of capital requirements across different countries and to make them stronger buffers 

against both asset implosions and liquidity runs. We need to continue to insist that 

European capital standards and derivatives regulations are strong—and enforced 

even-handedly across the board. 

The United States has taken a strong lead in pursuing global reforms, galvanizing 

the G–20, pushing for the creation of the global Financial Stability Board, and pursuing strong global reforms on capital, derivatives, resolution, and other matters. 

The G–20 has been driving financial reforms at a global level; the Financial Stability Board pursues agreement among regulators; and technical teams at the Basel 

Committee on Banking Supervision, the International Organization of Securities 


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* Chris Brummer is Professor of Law at Georgetown University Law Center and Faculty Director of the law school’s Institute of International Economic Law. He is also Project Director 

for the Transatlantic Finance Initiative and C. Boyden Gray Fellow at the Atlantic Council, as 

well as senior fellow at the Milken Institute’s Center for Financial Markets. 1See Article 16, FSB Charter, http://www.financialstabilityboard.org/wp-content/uploads/

rl090925d.pdf?pagelmoved=1; see also Article 23, http://www.financialstabilityboard.org/wpcontent/uploads/FSB-Charter-with-revised-Annex-FINAL.pdf (amended). 

Commission, and the International Association of Insurance Supervisors hash out 

industry-relevant reforms. While the process of reaching global agreement has at 

times been quite messy, divisive, and incomplete, the last thing we need is to hamstring global cooperation or U.S. regulation. These mechanisms should be strengthened and improved, not ignored or weakened. 

Strong U.S. financial rules are good for the U.S. economy, American households 

and businesses, and we also need a stronger, harder push to reach global agreement 

on core reforms. In fact, such an approach is essential in order to reduce the chances 

of another devastating global financial crisis that crushes the U.S. economy. 

The task of financial reform is not over. We need to keep pushing forward if we 

are to have a financial system that is safer, fairer, and better serves our economy. 

PREPARED STATEMENT OF CHRIS BRUMMER, J.D., Ph.D. *

PROFESSOR OF LAW, GEORGETOWN UNIVERSITY LAW CENTER

JULY 8, 2015

What’s in it for the United States?: On the Constitutionality and Legitimacy 

of the FSB (and International Financial Regulation) 

The fact that legislators discuss and grapple with FSB policies is in itself a testament to just how far ‘‘soft law’’—nonbinding, international accords between regulators—has come. When discussing policies, international policymakers routinely 

reference FSB principles and best practices, and even domestically, in the United 

States, administrative agencies from the Federal Reserve to the Securities and Exchange Commission grapple with and publicly acknowledge notions of international 

regulatory ‘‘commitments’’ and ‘‘obligations.’’

That U.S. agencies take the FSB and other international standard setters seriously does not, however, a constitutional crisis make. By definition, international 

soft law standards do not create any formal obligations. They are not treaties under 

the Vienna Convention on the Law of Treaties or under Article II of the U.S.

Constitution. Instead, both the FSB’s original charter and its revision (as well as 

virtually all other international standards) explicitly state: ‘‘This Charter is not intended to create any legal rights or obligations.’’1

As informal organizations, the FSB, Basel Committee, IOSCO and other regulatory bodies instead rely on their members to participate in discussions, and after 

participating, to voluntarily implement those standards at home by crafting them 

to their local conditions. In the United States, this implementation is done in accordance with the Administrative Procedure Act and other internal agency policies, 

as well as in keeping with the mission and mandate of the specific regulator involved. A bilateral or multilateral memorandum of understanding on enforcement 

coordination, for example, is justified and operationalized on the basis of the SEC’s 

core mission of investor protection (which necessarily requires cross-border cooperation in today’s globalized financial markets); similarly, articulations on interest rate 

benchmarks speak to concerns regarding capital allocation in global markets (and 

again require cross-border cooperation). Even the more recent but controversial rule 

on asset managers speaks to core concerns among regulatory agencies on the impact 

of shadow banking on financial and price stability, and capital allocation. 

Furthermore, as a tool for achieving the mission of regulatory agencies, international standard setting bodies like the FSB enjoy both functionality and usefulness—and even as informal instruments can exhibit considerable ‘‘compliance pull.’’ 

Markets, for one, often take direction from best practices in an assumption that they 

provide an indication or roadmap of future regulatory rulemaking. Meanwhile, regulators recognize that in order to influence other countries, they can’t lead from behind. Instead, they have to lead by example. 

Fortunately for the United States, its ability to impact global standard setting 

bodies is in many ways unmatched:

• The United States was a founding member of every major international regulatory forum—distinguishing it from China, Russia, Brazil India and even


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Germany and (depending on how one dates the founding of IOSCO) the United 

Kingdom;

• In most agencies, consensus expectations for decisionmaking give the United 

States a de facto veto authority on most international initiatives;

• The United States hosts the world’s largest and most liquid capital markets giving it unparalleled capabilities to impact a number of fields including securities, 

accounting and auditing;

• Emerging markets have been noticeably subdued on Basel Committee and even 

FSB, leaving comparatively like-minded countries of the G10 (under U.S. leadership) to dominate discussions on core banking and financial stability matters;

• Although Europe technically has more countries sitting on some bodies (since 

individual member states can participate), they are often constrained by a necessity to act in unison and EU-level policymaking capabilities are in many sectors still in early stages; and

• The United States boasts the largest (though not best-paid) workforce and thus 

has a home regulatory ‘‘back office’’ allowing the United States to process and 

present data and reforms with unparalleled sophistication.

With all this in mind, however, let me be clear: the FSB (and indeed global standard-setting more generally) is no panacea. A number of issues can and do confound 

the process. In part because of their informality, mandates and missions of international standard setting bodies can (and at times do) overlap. This causes intermittent turf wars (most notably between the FSB and IOSCO—two relatively young 

standard-setting bodies seeking to establish credibility) that do not always speak 

well of international diplomacy or financial regulation. 

Furthermore, even though the FSB and other standard-setting bodies may be constitutional, they do not always boast the kind of popular or policy legitimacy some 

U.S. stakeholders would prefer. This lies in part from the turf wars described above. 

Dissension between international standard setting bodies, which can be an expression of honest disagreement or the political posturing of competing bureaucracies, 

by definition leads outsiders to conclude that one party is ‘‘wrong,’’ undermining the 

sense that the substantive output, perhaps of both agencies is of the highest quality. 

Furthermore, legitimacy can be undermined because of the complicated institutional 

arrangement supporting the rulemaking, and the at times opaque nature of decisionmaking. Indeed, some standard setting bodies do not always practice notice and 

comment procedures allowing for the same levels of nongovernmental and stakeholder participation that one expects here in the United States. 

In my opinion, however, these challenges, do not merit a wholesale unwinding the 

work of cross-border standard setting, or the FSB in particular. For one, the turf 

wars played out internationally also have domestic drivers. The SEC, for example, 

does not participate in G20 meetings like the Federal Reserve and Treasury do, and 

is overshadowed by both in the FSB. Thus its best opportunity to articulate and advance its vision internationally is through IOSCO, which it dominates and where 

neither the Federal Reserve or Treasury have a seat. That policy discord can subsequently arise at the international level, given the varying priorities of prudential 

and market supervisors, should thus not be surprising. 

Second, jettisoning or (erroneously) maligning the international architecture as 

unconstitutional would undermine, as already spelled out above, an important strategic advantage the United States currently enjoys—the ability (to resuscitate the 

objectives of the TPP) to ‘‘write the rules of the 21st century,’’ with if not an American pen, at least with a good dose of U.S. ink. 

Third—and this is a point opponents to international financial regulation often 

miss—the FSB, and international standard setting bodies more generally, do not 

only write rules, but they also serve as the basis of more streamlined cross-border 

financial services. To the extent to which, for example, the FSB is able to articulate 

shared paths on issues like capital, margin, interest rate policy, and reducing credit 

rating agency reliance, it is facilitating the interoperable and harmonized provision 

of cross-border services. Moreover, regulators use the logic and principles embedded 

in the standards to justify the recognition of market participants (including those 

in the United States) as equivalent. And when this is done, it is done via the mechanism of soft law (and often explicitly referencing FSB, IOSCO or Basel Committee 

reforms). From this standpoint, some intellectual consistency is required: if international standard setting bodies are to be applauded for establishing the conditions 

for more efficient cross-border finance, and effectively lower regulatory burdens, 

they can’t be condemned as illegitimate when they raise them in order to safeguard 

markets. 


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Again, I do not wish to downplay the considerable challenges of international regulatory policymaking. Even with the overwhelming influence practiced by the 

United States, we still have to negotiate with our partners, and occasionally make 

compromises. And compromise is slow, and won’t always get to the best results for 

the United States. So we have to be agile and tailor our domestic practice in ways 

that speak to international commitments credibly while also achieving our own prudential and market objectives. Furthermore, turf wars can compromise the effectiveness of international financial regulation, and even undermine the robustness of 

global reforms. That said, these are procedural and institutional challenges—indeed, 

challenges that the United States is in an enviable position to address with the 

right political (and regulatory) will. The ideal Congressional oversight would elevate 

these concerns to the top of the regulatory agenda, and not promote strategically 

maladroit initiatives targeting our very tools of economic statecraft.


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