Alleviating Stress Test Burdens to Help Investors Act

Floor Speech

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Mr. Speaker, I rise to oppose H.R. 4566, the so-called Alleviating Stress Test Burdens to Help Investors Act, which would make it harder for regulators to identify and mitigate hidden systemic risks at nonbank financial companies before they undermine our economy.

Last Wednesday marked 10 years since global investment bank Bear Stearns imploded as a result of its failure to manage risk associated with its highly leveraged balance sheet and exposure to the subprime
mortgage market. American taxpayers were forced to come to the rescue to prevent the firm's collapse from spreading to other overleveraged Wall Street institutions.

The demise of Bear Stearns was the canary in the coal mine for the ensuing financial crisis, which ravaged the United States economy, destroyed trillions of dollars of wealth, and put millions of Americans out of their jobs and their homes.

Democrats responded to the 2008 financial crisis by passing the Dodd-Frank Act, which, among other reforms, required rigorous stress tests of the Nation's largest financial institutions. The Dodd-Frank Act also gave the Federal Reserve Board the discretion to quickly intervene and stress-test firms that could pose financial stability risk.

If regular stress testing had been conducted on firms like Bear Stearns from 2006 to 2008, it might have revealed major threats to the economy sooner, giving both the companies and Federal financial regulators a better chance to take remedial action to avoid a catastrophic near collapse of the global financial system.

H.R. 4566 would eliminate the Federal Reserve's authority to stress-test nonbank financial companies, even in situations where the firm's designation as systemically important is pending before the Financial Stability Oversight Council, FSOC.

Additionally, the bill would weaken the Dodd-Frank mandate that large financial companies under the SEC and CFTC's purview conduct internal stress tests to determine the company's ability to withstand a
recession.

Combined, these rollbacks would allow the Bear Stearns of the world to take on increasing amounts of risk while regulators are tied up in lengthy administrative processes.

As former SEC Chair Mary Jo White stated in a December 2014 speech: ``Stress testing is an important tool routinely used by banking regulators. Implementing this new mandate in asset management, while relatively novel, will help market participation and the Commission better understand the potential impact of stress events.''

I agree with Chair White's comments about the importance of stress testing and think that it simply does not make sound public policy to eliminate this tool.

Members of the asset management industry have also recognized that stress testing is critical to effectively managing risk. In a 2015 letter to the SEC, the Asset Management Group of the Securities Industry and Financial Markets Association, that is SIFMA AMG, whose members manage more than $30 trillion in assets, wrote: ``Stress testing is one part of an effective and coherent risk management process for asset managers, the objective of which is not to test for solvency or capital adequacy, but to complement other approaches in
assessing investment risk.''

In fact, in a 2015 survey of SIFMA AMG members, nearly two-thirds of the asset managers surveyed reported that they already stress-test their funds. It seems imprudent that Congress would repeal a requirement for large interconnected hedge funds that may have 15-to-1 leverage to periodically determine whether they could withstand a down economy.

Moreover, given how rapidly failures at large nonbank financial companies can spread across the highly interconnected financial system, regulators must be able to quickly identify problems that could undermine U.S. financial stability. The Federal Reserve should continue to have the discretionary authority to step in to identify and mitigate systemic risk at any financial company whose failure could pose a threat to our economy.

H.R. 4566 appears to ignore that nonbank financial companies like Bear Stearns, Lehman Brothers, and AIG played a central role in the financial crisis. When these firms collapsed as a result of their failure to mitigate their own internal risk, their losses sent shockwaves throughout the banking system.

Stress testing these kinds of nonbank financial institutions provides a valuable early warning system for our economy and gives both the companies and regulators a chance to correct problems before they have catastrophic effects on our financial stability. That is why I intend to offer an amendment that, if adopted, would restore the Fed's discretionary authority to stress test any nonbank, provided that the test meet certain conditions, including approval by a majority of FSOC members. It would also allow the Fed to use alternatives to capital, as appropriate, when stress-testing systemically important nonbanks and broaden the SEC's and CFTC's authority to require internal testing for entities under their purview.

This amendment would ensure that large financial institutions, like investment companies that manage trillions of dollars of hardworking Americans' retirement savings, can be appropriately evaluated for their ability to survive in a stressed economy.

While I oppose H.R. 4566 in its current form, I would support an amended version of the bill that preserves the bill's ability to identify and mitigate future systemic risk at nonbanks before they lead to another crisis.

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Mr. Speaker, first, let me thank my colleagues on the opposite side of the aisle and my chairman, Mr. Hensarling, for indicating their acceptance of the amendment.

I think it is extremely important for both sides of the aisle to appreciate the necessity and the importance of stress testing, and I think we both do that. The discretion that we afford to the Feds in this bill, I think, is very important. So this is one of those instances when both sides can come together and recognize that there
were important indications of what is needed to understand what should be done to avoid another meltdown in our financial services industries and our banks.

Again, I don't think there is any need for us to continue to talk about what we don't like about stress testing, but, rather, we are coming together to talk about how it is done and why it is important. I have a great appreciation for that, and I would like to thank my colleagues for that.

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Mr. Speaker, I am very pleased about the work that staff has done on this particular legislation.

I do believe that we all agree that stress tests are important; it is a matter of who, how, and when.

Someone has likened stress tests to car testing, where, in the manufacture of new cars, you take them out on the road and you test them to see if they can withstand what they may be presented with in the terrain and with the kind of things that you would experience perhaps on the roughest roads that they test on. When they determine that there are weaknesses that can be corrected, that is what they do in order to make sure that this new vehicle that they are testing can withstand whatever the difficulties are that may be presented to them
when they test a car.

That is what this stress testing is all about. It all about whether or not, in the event of a downturn in our economy, you have the ability to withstand the downturn, whether or not you have the ability to not only withstand what you are presented with in a downturn of the economy, but how you can fix what you have determined is wrong with what you are doing.

So I am, again, very pleased that we all agree that stress testing is extremely important and that we know what your concerns are about hedge fund and asset managers and all of that. But the discretion that we give to the Feds, I think, is very important. The fact that all of the businesses that we are concerned with will be doing their internal stress testing is extremely important.

So, again, I am very grateful for the acceptance of my amendment, and I am hopeful that, with this amendment, it demonstrates that, when we work very hard to reconcile our differences, we can do that.

Mr. Speaker, I would ask that, with this amendment, all of the Members of the House vote for this legislation, and I yield back the balance of my time.

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Mr. Speaker, in its current form, H.R. 4566 eliminates the Fed's discretion to require stress testing on nonbanks that have not yet been designated as systemically important and weakens the Dodd-Frank Act's mandate that the SEC and CFTC require nonbank financial companies under their authority to conduct annual stress tests. Together, these repeals create a loophole that would allow large brokerage firms and mega insurance companies to ignore risks while regulators are tied up in lengthy rulemaking or the FSOC designation process.

My amendment, if adopted, would restore the Fed's discretionary authority to stress-test any nonbank financial firm, provided that the test is requested by a majority vote of the FSOC, is conducted with consideration of the company's business model, and is not already required by the company's primary regulator.

My amendment would also allow the Fed to consider alternatives to the existing capital adequacy test, where appropriate, when conducting stress tests on nonbanks, including those designated as systemically important.

One of the key safeguards created by Dodd-Frank is the Fed's ability to identify and mitigate risks in the financial system before they undermine the U.S. economy. By preserving the Fed's ability to stress-test nonbank financial companies on a discretionary basis, my amendment will give regulators a better chance of preventing the next Bear Stearns or Lehman Brothers from dragging down our financial system.

Finally, my amendment would broaden the SEC's and CFTC's authority under the bill by striking the provision that would limit future company-run stress testing requirements to entities with more than $10 billion in assets. This would ensure that the SEC and CFTC can require any financial company under their purview to evaluate their own ability to survive in a stressed economy.

While I oppose H.R. 4566 as currently drafted, with this amendment, the bill would represent a truly bipartisan effort to strengthen Dodd-Frank. Mr. Speaker, I would urge my colleagues to vote ``yes'' on my amendment.

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