Madam Chairman, Ranking Member Green, and Members of the Subcommittee, thank you for the opportunity to be here today. I am Alex Pollock, a senior fellow at the R Street Institute, and these are my personal views. I spent 35 years in banking, including twelve years a President and CEO of the Federal Home Loan Bank of Chicago, and then eleven years as a fellow of the American Enterprise Institute, before joining R Street last year. I have both experienced and studied numerous financial crises and financial cycles, including the political contributions to creating them and the political reactions afterward, and my work includes the issues of banking systems, central banking, risk and uncertainty in finance, housing finance and government-sponsored credit, and extensive study of financial history.

To begin with, let me compliment the committee staff for their detailed, specific paper on the FSOC’s non-bank designation process. The paper embodies a very good analytical idea: it “compares the FSOC’s evaluation memoranda [of various companies] against one another to measure the consistency of the FSOC’s analysis.” This comparison, as documented in the paper, results in the conclusions that the treatment of different companies is not consistent, that FSOC did not follow its own formal guidance, and in summary, that the evaluations upon which companies either were or were not designated as systemically risky (as “SIFIs”) “have been characterized by multiple inconsistencies and anomalies on key issues.”

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Chairman Wagner, Ranking Member Green, and distinguished members of the subcommittee, thank you for convening today’s hearing on the FSOC non-bank SIFI designation process, and for inviting me to testify. I am a resident scholar at the American Enterprise Institute, but this testimony represents my personal views. My research is focused on banking, regulation, financial stability and systemic risk. I have prior experience working on these issues at the Federal Reserve Board, the IMF and the FDIC, including as chairman of the Research Task Force of the Basel Committee on Banking Supervision. It is an honor for me to be able to testify before the committee today.

I want to begin my testimony with an analogy that explains the deficiencies in the FSOC designation process using an everyday commuting experience to which many can relate.

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Chairman Wagner, Ranking Member Green, and members of the Subcommittee, thank you for the opportunity to appear today and share my views on the Financial Stability Oversight Council’s (FSOC) non-bank designation process. And thank you for your work on the report released earlier this month. I’ve found it useful in highlighting and explaining both the procedural and substantive problems with FSOC. FSOC’s mission is to identify, monitor, and address threats to America’s financial stability. Yet, the current process by which non-bank financial companies are designated as systemically important financial institutions (SIFIs) and the heightened oversight and regulation they fall subject to thereafter, is inherently flawed and risks losing the confidence of the public and policymakers and burdening the economy without any notable benefits.

In my testimony, I wish to make three main points:

• FSOC’s process, inconsistent or not, has prioritized designation and regulation of institutions, often arbitrarily, over the identification of activities that pose systemic threats and has done so in a fundamentally flawed manner. I applaud the Subcommittee for making a critical investigation into this process and all its implications.

• Designating a non-bank financial institution as a SIFI is consequential for both the institutions and the institutions’ customers. Those consequences include, but are not limited to, decreased international competitiveness for American companies in the international market and increased costs with decreased benefits for consumers.

• Thus far only insurance companies have been designated as non-bank SIFIs. A good argument can be made for removing FSOC’s authority to regulate those non-bank financial companies, as these companies are already being regulated at the state level. The increased burdens from FSOC’s oversight are unnecessary and provide no additional financial stability.

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Questions concerning the nature, magnitude, scope, management, oversight, and supervision of systemic risk have dominated research and policy regarding financial service providers following the 2007-2009 crisis. The September 2008 collapse and federal government rescue of American International Group (AIG) in particular have had an enormous influence on regulatory policy. Section 113 of the 2010 Dodd-Frank Act established the Financial Stability Oversight Council (FSOC) with authority to designate systemically important nonbank financial institutions (nonbank SIFIs) for enhanced supervision by the Board of Governors of the Federal Reserve “[I]f 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 the activities of the nonbank financial company could pose a threat to the financial stability of the United States.”

Acharya et al define SRISK as a macro-finance measure of systemic risk to furnish “an estimate of the amount of capital that a financial institution would need to raise in order to function normally if we have another financial crisis.”  SRISK measures the “expected capital shortfall” of an institution during a financial crisis, defined as the “projected market capitalization” if equity markets declined by 40% based on historical stock market correlations (i.e. equity beta) minus the “prudent market capitalization,” defined as greater than or equal to 8% of total assets, a leverage ratio.

Acharya and Richardson use SRISK to argue that select insurers are as vulnerable to large capital shortfalls as are banks in stressed macroeconomic environments. In this paper, we argue the inappropriateness of SRISK as a measure of systemic risk for insurers.

SRISK for Insurers

Thank you, Jerry, and congratulations to Alison Watson on becoming the new Chancellor of the Exchequer Club. I hope your new position does not cause Northwestern Mutual to be deemed systemically important.
I am pleased to have this opportunity to speak to the members of the Exchequer Club ─ including my colleague Heather Wingate, who is head of global government relations for MetLife and a Club member.
In my remarks today, I will ─

 Provide some background on MetLife;
 Describe ─ in general terms ─ our interactions with FSOC;
 Discuss our legal challenge to our designation as a systemically important company; and
 Propose an alternative to the FSOC designation process.


Remarks of Ricardo Anzaldua

One of the themes of this year’s Capital Markets Summit is how efforts to eradicate risk from the financial system can have serious unintended consequences. Nowhere is that more true than in the U.S. life insurance industry.


Steve Kandarian Speech