Patrick McHenry, chairman of the House Financial Services Committee, sent a letter to Treasury Secretary Janet Yellen, chair of the Financial Stability Oversight Council (FSOC), in which McHenry invited Yellen to reconsider the FSOC’s decision to shift the focus from activities to size.
McHenry's letter demanded that the FSOC reconsider its decision in April, which altered the evaluation of risks posed by nonbank financial entities. The decision shifted focus from activities to size, potentially leading to significant regulatory consequences for the financial system, he said.
"The actions are contrary to the due process protections afforded by the Constitution and mark a sea change in the long-standing principles the Council uses to review these entities," McHenry wrote. "If left unaddressed, the actions will set a dangerous precedent that will have consequences for the broader financial system."
The Council had last evaluated in 2019 whether the activities of a nonbank financial institution posed a systemic risk, adhering to the principle of "same entity, same risk, same regulation." In April, however, the FSOC disregarded the nature of the entity's activities and focuses solely on its size when assessing risk, a Treasury Department fact sheet read.
The guidance, voted on April 21 introduced a two-stage process for evaluating nonbank companies. First, an analysis is conducted based on available information, and then selected companies move to Stage 2, where they are evaluated and may receive a proposed designation for Federal Reserve supervision and prudential standards. Designations are made after a hearing, the fact sheet stated.
“As we have learned from the experience of Silicon Valley Bank, oversight by the Federal Reserve is not a panacea for financial stability," McHenry wrote. "Moreover, the systemic risk designation comes with significant consequences. Congress did not intend this designation to be politicized nor weaponized. I urge the Council to revisit its published assessments, analysis and interpretive guidance impacting nonbank financial institutions.”