The U.S. House of Representatives passed legislation that amends the Dodd-Frank Act. The "Systemic Risk Designation Improvement Act," H.R. 6392 replaces the mandate that bank holding companies ("BHCs") with over $50 billion in assets are automatically subject to enhanced supervision. The amendments provide for a more discretionary approach for such a determination to be made by the Financial Stability Oversight Council ("FSOC").
The Systemic Risk Designation Improvement Act establishes that the FSOC may determine that a BHC should be subject to enhanced supervision and prudential standards by the Board of Governors if it determines that "material financial distress" at the BHC poses a threat to the financial stability of the United States. In making such a determination under H.R. 6392, FSOC would use the indicator-based measurement approach established by the Basel Committee on Banking Supervision to determine systemic importance. This approach considers a BHC's size, complexity, interconnectedness, extent of readily available substitutes or financial institution infrastructure for its services, and global cross-jurisdictional activity.
The Systemic Risk Designation Improvement Act also states that FSOC may begin proceedings with respect to a BHC, but may not make a final determination with respect to a BHC before the end of the one-year period beginning on the date of the enactment of the act. During that one-year period, a BHC with total consolidated assets equal to or greater than $50 billion will be deemed to have been the subject of a final determination.
Commentary/Steven Lofchie
Senator Elizabeth Warren complained that this bill would take power away from independent regulators and would give too much discretion to political appointees. The most significant issue of discretionary regulation, however, was created by Dodd-Frank itself, which provided for the formation of FSOC, and afforded FSOC the ability to declare that certain institutions were "systemically significant" under standards that are extremely open-ended and, subsequently, to regulate those institutions according to rules that are equally open-ended. Ideally, the new administration will undo Dodd-Frank's myriad of problems regarding the regulation process (e.g., excessive discretion, in the case of FSOC, and the one-party rule, in the case of the Consumer Financial Protection Bureau), and not exacerbate those problems. The financial services industry would benefit substantially from a regulatory system that was more concrete and afforded less discretion to regulators. That also would be consistent with the idea of the rule of law.
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