The oversight subcommittee of the House Financial Services Committee sought clarity Tuesday afternoon on how financial regulators plan to regulate so-called "too big to fail" banks under the Dodd-Frank financial reform act.
The oversight hearing focused on two different parts of the Dodd-Frank act that give regulators the power to regulate large and "systemically important" financial institutions.
Republican lawmakers pressed representatives of the Federal Reserve Bank and the Federal Deposit Insurance Corporation (FDIC) on the meaning of several key concepts within the law and the circumstances under which these concepts would apply.
Chief among the lawmakers concerns was the Orderly Liquidation Authority, which gives regulators the ability to break up banks and other financial institutions that pose a "grave threat" to the nation’s economic stability.
Subcommittee chairman Patrick McHenry (R., N.C.) was the first to ask about the definition of "grave threat." He was not the last.
The definition of a "grave threat" would "depend very much on the facts and circumstances of the case," said Scott Alvarez, general counsel for the Federal Reserve Board of Governors.
That answer that did not sit well with McHenry and other Republican lawmakers.
Alvarez also conceded that the liquidation authority could be used at any time, even in times "of relative peace and harmony and accord," in McHenry’s words.
"It is very open ended," Alvarez said of the law’s conditions for invoking the authority.
Alvarez said the process for the liquidation authority is strong enough to protect banks. After the Federal Reserve deems a bank or other institution a "grave threat," the Financial Stability Oversight Counsel has to agree with a two-thirds majority. There are also several actions that must be taken before the bank or institution can be "liquidated" or broken up.
However, Alvarez’s assurances did not ease the concerns of many lawmakers who wanted more clarity on the circumstances around the various authorities.
"Is there a proof standard?" asked Rep. Randy Hultgren (R., Ill.).
"The FSOC will have to have enough information to make sure that it is satisfied that it can make this determination" about a grave threat, Alvarez replied.
"Does it have to pose a grave threat, Mr. Alvarez, or in fact does [section] 121 give regulators the authority to break up a healthy financial company?" asked Ann Wagner (R., Mo.).
"Only if it actually poses a grave threat," Alvarez said, conceding regulators could end up liquidating a healthy institution.
Rep. Sean Duffy (R., Wis.) pressed the regulators on the risk that the Federal Reserve could use the threat of liquidation to put political pressure on banks.
"When you don’t have clear standards in place, it opens the door for, I think, bad governance," Duffy said. "We're really sitting here in the dark."
While it was primarily Republicans seeking more clarity into the implementation of the law, at least one Democrat also raised concerns.
Rep. Emanuel Cleaver (D., Mo.) noted that big banks are bigger now than before the financial crisis. Smaller local banks are struggling and are facing massive amounts of regulation.
Cleaver also noted that regulators have been issuing regulations at a slow pace. President Obama signed Dodd-Frank into law in July 2010.
However, Cleaver was largely alone among the Democrats in his critiques of the bill.
Subcommittee ranking member Al Green (D., Texas) defended Dodd-Frank as necessary to protect taxpayers and regulate large institutions. Rep. Carolyn Maloney (D., N.Y.) said the law allows regulators "really to confront the crisis."