- Financial Services
- Retirement Security
The Financial Stability Board’s Implications for US Growth and Competitiveness
Statement of Paul Schott Stevens
President and CEO
Investment Company Institute
U.S. House of Representatives Committee on Financial Services
Subcommittee on Monetary Policy and Trade
September 27, 2016
As prepared for delivery.
Thank you, Chairman Huizenga, Ranking Member Moore, and members of the Subcommittee, for inviting me to testify on the role of the Financial Stability Board (FSB).
ICI supports appropriate regulation to ensure a resilient and vibrant financial system, and that includes looking at potential risks in asset management. We also favor international regulatory coordination, and have responded constructively to the FSB’s efforts.
Just last week, we filed a comment letter commending the FSB for its focus on activities across the asset management sector, and for referring specific recommendations to IOSCO and its members for development.
Here in the United States, we have supported SEC Chair Mary Jo White’s examination of asset management practices and related rulemakings.
That said, the work of the FSB remains a cause for deep concern. Why? Because the FSB has promised to return to the question of designating institutions like US stock and bond funds as “systemically important”—a step that could have grave implications for US regulated funds and the 90 million Americans who depend on them for their financial goals.
From its inception, the FSB has been dominated by central bankers and a banking mentality. To these central bankers, capital market activity constitutes “shadow banking”—a risky form of finance because it is not regulated like banks. While IOSCO and securities regulators are beginning to take a larger role, the FSB’s work on asset management is still overseen by banking regulators who lack understanding of the capital markets.
That’s reflected in FSB’s emphasis on “distress” and “disorderly failure”—concepts derived from banking experience. And the FSB’s return to SIFI designation for funds would bring asset management under bank-style regulation—no matter how harmful or inappropriate that might be.
We have serious reservations about transparency, fairness, and accountability in the FSB’s work. As members of this subcommittee know, Congress cannot even determine what positions the US delegation takes in FSB deliberations—the Treasury Department and Federal Reserve simply will not say.
The FSB’s work falls far short of being evidence-based. It disregards empirical data and analysis in favor of hypotheses and conjectures, conjuring up visions of “fire sales” and “spillover effects” to support its notion that regulated funds and their managers may pose threats to financial stability.
ICI and its members have provided extensive data and analysis that squarely rebut the FSB’s hypotheses about regulated funds and fund managers. And we have urged—thus far to no avail—that the FSB re-examine the premises of its work in this area in light of the empirical evidence.
Taken together, all these problems raise questions as to whether the FSB’s work in asset management is simply results-oriented—that is, intended to ensure the designation of the largest and most successful funds and their managers, primarily US funds, as SIFIs.
After all, the very purpose of the FSB is to influence and shape regulation in the United States and other countries. We are concerned that the FSB’s designation work could front-run and prejudge issues at the US Financial Stability Oversight Council. The US representatives to the FSB are the principal players on the FSOC. The FSB’s designation of three US-based insurance companies presaged FSOC’s designation of those same companies. Similarly, a flawed FSB “methodology” that identifies US funds for scrutiny might very well be used as justification for designating those funds by FSOC.
If this flawed process results in SIFI designation for US funds, the consequences for funds and their millions of investors will be serious indeed. Under existing US law, designated funds would be subjected to inappropriate bank-style regulation. Higher costs will harm investors’ returns and create competitive imbalances, potentially reducing investor choice. Fed supervision could put the interests of the banking system ahead of funds’ fiduciary duty to their own shareholders. And America’s retirement savers could be on the hook to help bail out other failing financial institutions.
For all these reasons, we urge that Congress provide effective oversight of the US agencies participating in the FSB, and encourage constructive reforms. If Congress is to fulfill its constitutional role, its oversight must extend to multilateral bodies like the FSB that are expressly designed to shape domestic US regulation.
Finally, Mr. Chairman, let me just note that the FSB’s process, transparency, and analytical shortcomings also are apparent at the FSOC. That’s why ICI strongly supports H.R. 1550, the bipartisan Ross-Delaney FSOC Improvement Act, a bill that will codify important improvements to the SIFI designation process and advance the goal of reducing systemic risk.
Thank you for your attention, and I will be happy to address your questions.