ATR Supports Sen. Tillis Questioning Federal Reserve Oversight Framework

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Posted by James Setterlund on Tuesday, April 30th, 2019, 2:17 PM PERMALINK

In February, Senator Thom Tillis sent a letter to the Government Accountability Office’s Comptroller General asking for clarification on several Federal Reserve guidance letters that established the Large Institution Supervision Coordinating Committee. The letter asks GAO to determine if the guidance constitutes a “rule” and is subject to the Congressional Review Act. The LISCC guidance letters themselves carry the weight of additional Federal Reserve oversight subjecting financial institutions to compliance and enforcement. 

Senator Tillis’ letter follows in the footsteps of Senator Pat Toomey’s letter to GAO requesting the agency to determine if a Consumer Financial Protection Bureau Bulletin also constituted a rule. Known as the “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act” Bulletin, itset out to address a common lending arrangement between auto dealerships, customers and third-party lenders. At the end of 2017, GAO determined the Bulliten, or “guidance”, was in fact a rule and is subject to the Congressional Review Act.

The CRA provides Congress 60 legislative days to use the CRA and issue a resolution that disapproves and overturns a federal agency’s rules and prevents the agency from issuing a substantially similar rule in the future. If GAO determines LISCC to be a rule, the rule is considered published in the Congressional Record, starting the 60-day clock.

Through a series of Supervision and Regulation Letters the Federal Reserve created the LISCC supervisory program to oversee large financial institutions operating domestically and abroad with multiple business operations. The Large Institution Supervision Coordinating Committee currently supervises a total of 12 banks – eight US-charted banks and four-foreign banks with significant US operations – and is overseen by four Federal Reserve Banks in which the 12 banks are geographically located.

As Senator Tillis points out:

"Though the Federal Reserve did not pursue notice and comment, the LISCC Guidance appears to be generally applicable within its intended range, prospective in nature, and designed to implement, interpret, or prescribe law or policy. The LISCC Guidance not only describes the Federal Reserve's approach to examining large institutions, but also imposes significant substantive requirements on the banking institutions subject to the guidance."

Should GAO conclude that the LISCC Guidance constitutes a rule, and the Federal        Reserve Board moves to codify existing regulatory framework, the Federal Reserve should provide transparency that includes:

  • Establishing an official rulemaking process, allowing for public notice and public comments, as well as a cost-benefit analysis for future rulemaking and SR Letters. 
  • Create a formal process that provides financial institutions with a clearly defined criteria for LISCC designation and a pathway for de-designation. 
  • The ability for institutions designated for LISCC oversight the opportunity to appeal the designation.

 

Click here to view the letter applauding Senator Tillis’ leadership on the issue or see below:

April 29, 2019 

The Honorable Thom Tillis United States Senate
185 Dirksen Senate Office Washington DC 20510 

Dear Senator Tillis: 

I write in support of your letter to the Government Accountability Office Comptroller Dodaro questioning whether the Federal Reserve’s Large Institution Supervision Coordinating Committee process constitutes a rule subject to the Congressional Review Act. I share your concern that the Federal Reserve has established a regulatory framework through compliance and enforcement, without allowing for public input through the appropriate rule making process. 

In 2010, the Federal Reserve created a new supervisory program to oversee large financial institutions operating domestically and abroad with multiple business operations. The Large Institution Supervision Coordinating Committee currently supervises a total of 12 banks – eight US-charted banks and four-foreign banks with significant US operations – and is overseen by four Federal Reserve Banks in which the 12 banks are geographically located.1 

Through a series of Supervision and Regulation Letters (SR 12-17, 14-08 & 15-07) referenced in your letter to Comptroller Dodaro, LISCC appears to have been established following a report2 and its recommendations conducted by former Columbia University professor David O. Beim. According to a 2017 Government Accountability Office report, the four Reserve Banks are responsible for “designating firms for supervision under the LISCC program, the Federal Reserve takes into account a number of factors, such as the size of the financial institutions, their interconnectedness, a lack of readily available substitutes for the services they provide, their complexity, and their global activities.”3 

The designation process is concerning for two reasons. First, it appears that financial institutions subject to SR Letters 12-17 and 14-84 are automatically captured by LISCC and subject to Federal Reserve enforcement. Additionally, this could capture non-bank financial institutions that have been designated as Systemically Important 

Financial Institutions by the Financial Stability Oversight Council.5 In effect, non- bank SIFI’s could be subject to all compliance costs and examinations administered by LISCC’s Operating Committee and may include the Comprehensive Capital Analysis Review6. 

For non-bank institutions to no longer be subject to any Federal Reserve oversight, including LISCC requirements, FSOC must first act to de-designate the institutions as SIFIs. For financial institutions held as large and “noncomplex,” the Federal Reserve will work on a case-by-case basis to determine if their risk profile continues to warrant LISCC designation.7 For the largest and complex financial institutions there is no formal and clearly understood process de-designation.8 

Should GAO conclude that the LISCC Guidance constitutes a rule, and the Federal Reserve Board moves to codify existing regulatory framework, the Board should consider reforms that provide transparency through the rulemaking process, allowing for public notice and public comments, as well as a cost-benefit analysis for future rulemaking and SR Letters. Transparency includes providing financial institutions with a clearly defined criteria for LISCC designation and pathway for de-designation. The rulemaking process should provide institutions designated for LISCC oversight the ability to appeal the designation. 

Senator Tillis, your concern is valid in that the Federal Reserve Board has created LISCC under its own initiative and discretion, unfairly designating institutions for stringent compliance requirements and burdens. The process for designation lacks transparency and as you correctly assert in your letter to Comptroller Dodaro, the framework for establishing LISCC appears to constitute rulemaking authority, though its creation stems from guidance carrying the full weight of enforcement and without a defined criteria available for public comment from industry stakeholders and the public found in rulemaking. I applaud your initiative and am looking forward to working with you on this issue. 

Sincerely,

Grover G. Norquist
President, Americans for Tax Reform 

 

 

Photo Credit: Rafael Saldaña

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