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REGULATION/LEGISLATION

Senators ask Mnuchin to review process for too-big-to-fail label

Treasury Secretary Steve Mnuchin
Treasury Secretary Steve Mnuchin

Key Senate Republicans urged the Trump administration to rethink the process for labeling firms whose failure could threaten the financial system, arguing it has led to substantial regulatory costs.

The Financial Stability Oversight Council, a panel of regulators with authority to impose additional oversight on non-bank financial companies, lacks transparency and has created "substantial new regulatory costs" for firms, 10 Republican senators said in a letter to Treasury Secretary Steve Mnuchin on Tuesday.

The lawmakers, including Tom Cotton of Arkansas and Mike Crapo, chairman of the Senate Banking Committee, said Mr. Mnuchin should review FSOC's processes as part of a wider review of financial rules.

“You have our strong support for using all the tools available as secretary of Treasury to end 'too big to fail' and ensure that hard-working Americans are not responsible for any new bailouts," the senators wrote.

A spokesman for Treasury didn't respond to a request for comment.

The Dodd-Frank Act established FSOC — whose members include the heads of Treasury, the Federal Reserve, the Securities and Exchange Commission and other agencies — to stamp out threats before they cause the level of carnage experienced in the 2008 financial crisis.

A change could affect insurers and asset managers — not the biggest U.S. lenders, which are automatically designated as systemically important.

Getting that label can bring consequences such as stringent capital and liquidity requirements and aggressive monitoring by the Federal Reserve. That's why insurer MetLife sued to free itself from the designation. The oversight council hasn't designated a new firm as systemically important in recent years.

The FSOC has been controversial, with Republican lawmakers rarely missing the chance to argue the panel lacks transparency and accountability.

President Donald Trump has directed regulators to review financial rules and report back on suggested changes, one of the first steps his administration has taken to do "a big number" on the 2010 Dodd-Frank law.

Major changes to the law would need to be made by Congress, and likely would require some Democratic support. Some Senate Republicans have also been looking into forcing changes with just 51 votes through a process known as budget reconciliation, which requires demonstrating rules are draining the government's checkbook. Eliminating FSOC's ability to designate firms as too big to fail and gutting regulators' power to intervene when U.S. banks fail are two issues that Republicans are considering for reconciliation.

House Republicans are also pushing for changes to FSOC. The Financial Services Committee, whose chairman is Rep. Jeb Hensarling of Texas, published a report earlier this month that said the council's process for designation is "arbitrary and inconsistent" and that the FSOC did not follow its own guidance. The panel held a hearing Tuesday to discuss the findings.

Mr. Mnuchin's predecessor, Jack Lew, previously defended the council's work. Testifying before lawmakers last year, he called FSOC's designation authority a "critical tool" to addressing weaknesses in the financial system and said council had become more transparent.