Systemic Risk Designation Improvement Act of 2016

Floor Speech

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Mr. Speaker, I rise in opposition to H.R. 6392, the Systemic Risk Designation Improvement Act of 2016. Although many aspects of this bill have sound arguments behind them, it contains fatal flaws which should preclude our support.

The financial crisis taught us many things about our markets and overturned some fairly fundamental assumptions that were widely held prior to it. One of the things we learned was the extent to which systemic risk could build up in a regulatory paradigm that was focused entirely on entity risk. It was quickly evident that the failure of a large institution posed a greater threat than previously believed.

At the same time the phrase ``too big to fail'' became public shorthand for some of these firms, economists and other experts talked about another important aspect, too interconnected to fail.

Asset size is a quick and useful metric for determining whether a firm is potentially so large that a failure could have a massive impact on systemwide stability, and evaluating the risks that single institutions can pose to the system often require a more nuanced approach.

The exposure of counterparties to a failing firm or exposures of other institutions to the same risks are systemic risk factors that should rightly be considered. Also, as the economy grows, many fixed thresholds, such as $50 billion, will shrink in importance. At the very least, the importance given to any asset size threshold needs to be periodically reconsidered in the scope of an economic indicator like GDP. Wherever the line is drawn, it should reflect the macroeconomic factors that the bank is nested in.

Moreover, there is anecdotal evidence that firms will avoid growth-- meaning, cutting back in lending--as they approach any fixed threshold.

I see this as a market distortion that reflects risks of increasing concentration rather than prudent risk management. I see this concern with nearly any fixed threshold for being deemed a SIFI.
However, I think that a nuanced, weighted process that gives deference to the expertise of regulatory agencies is appropriate.

Drawing lines to determine which firms warrant additional scrutiny will always be a difficult process. To the extent that the bill we consider today looks to other factors that a strong Financial Stability Oversight Council with adequate resources and leadership should consider, I believe that this is a good start.

I do think that there are improvements to be made in the designation threshold, but I think this bill has two core problems that prevent my support.

First, legislation to change the threshold should give sufficient specific direction that it would not move with changes to the political leadership of the FSOC. The concentration of an effective veto power in the hands of a single political appointee basically aggravates that concern tremendously.

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