House Committee Passes Temporary FSOC Reforms

Norbert Michel / June 20, 2014

The U.S. House of Representatives Financial Services Committee passed two good reform bills aimed at fixing the Financial Stability Oversight Council (FSOC). Both pieces of legislation address major problems with the council, but they provide only a temporary solution. The FSOC’s very existence perpetuates the too-big-to-fail problem.

Future government bailouts are now more likely because the FSOC identifies firms whose failure would—by its determination—be catastrophic to the U.S. economy. The following two bills address this issue, but they certainly do not solve it.

1. H.R. 4881, sponsored by Representative Randy Neugebauer (R–TX), places a one-year moratorium on the FSOC’s ability to designate any large (systemically important) insurance companies or asset managers for new regulations.
2. H.R. 4387, sponsored by Representative Scott Garrett (R–NJ), requires the FSOC to have more “open” meetings that include non-FSOC members. Garrett’s bill also increases the scrutiny of FSOC decisions by broadening the voting power of regulatory agencies on the FSOC. For instance, rather than allowing only the chairman of the Securities and Exchange Commission to vote on FSOC decisions, the entire set of SEC commissioners would vote.

Congress should fix the most glaring weaknesses in the way the FSOC functions, and the two above-mentioned bills are a great start toward that goal. However, Congress should be wary of giving the impression that the council should remain in existence because these flaws have been addressed.

The mere existence of the FSOC is wholly incompatible with the functioning of a dynamic private capital market. Congress’s best course of action is to eliminate the FSOC as soon as possible.