Sen. Tom Cotton (R., Ark.) questioned Treasury Secretary Steve Mnuchin on Tuesday about U.S. control of its own financial regulation and said the government should not cede its power to foreign bodies.
Cotton mentioned a letter he wrote with fellow members of the Senate Banking Committee raising concerns about the Financial Security Board (FSB), an international body he suspects of exerting undue pressure on American firms.
"We’re concerned that it’s morphed into a kind of global regulatory body using its peer-review mechanism as a quasi-enforcement tool to pressure U.S. companies into adopting global standards," Cotton said about the FSB. "I’m concerned about that kind of regulatory creep into U.S. jurisdictions, especially considering how dissimilar our financial markets are from any foreign markets. For example, we have thousands of small lenders, we have independent asset managers, and we have an insurance industry regulated by our states primarily."
He then asked Mnuchin whether FSB regulations were voluntary or binding, and Mnuchin said they were voluntary. Mnuchin went onto affirm that U.S. regulators have the final say.
"The U.S. banks are regulated by the U.S. regulators," Mnuchin said. "I think the purpose of the international standards, from our standpoint, is to make sure there is a level playing field for our banks—and to the extent that foreign banks have a lot less capital, that there are certain standards that they would adhere to. But that is not legally binding."
Cotton then looked back on recent actions by the FSB that may have exerted pressure on the Federal Reserve. He explained how Prudential and MetLife were designated as systemically important financial institutions (SIFI) by the FSB before they were so designated by the U.S.’s Financial Stability Oversight Council (FSOC).
"Prudential wasn’t designated as a SIFI by FSOC until September 2013, MetLife not until December of 2014," Cotton said. "Since the FSB operates by consensus, however, this means that for months before the FSOC designated either Prudential or MetLife as SIFI, your predecessor at Treasury and the chair of the Fed, two of the most important members at FSOC, had already determined as members of the FSB to designate Prudential and MetLife as globally systemically important, so I would assume that if a firm is systemically important on a global scale it must be systemically important in its own home country."
"The Treasury and the Fed, after all, had already determined as members of the FSB that they were globally systemic," he added. "Do you believe that this decision was simply a show trial by the FSOC in 2013 and 2014?"
Mnuchin answered by saying FSOC should be more transparent.
"Senator, since I wasn’t there I can’t comment on [it] specifically, although I understand your concerns," Mnuchin said. "I would say fundamentally I do believe that there should be better transparency at FSOC to the extent that companies are designated, they should understand why they’re designated, and the basis of the risks."
"Can we be certain that we will not see a repeat of such a scenario in which the FSB designates a U.S. firm as globally systemically important before the FSOC designates it as systemically important in the United States?" Cotton asked.
"I would not expect that to be the case," Mnuchin said.
Cotton thanked Mnuchin and concluded by explaining the importance of democratic control over regulation.
"Financial experts around the world haven’t exactly covered themselves in glory for the last 25 years. Our nations—not just the United States, but in Europe—have faced some turbulent political times with populist candidates in parties on both sides, right and left, across our nations, defeating more conventional politicians and parties because of the failure of our countries’ leaders to deliver stable prosperous conditions for our citizens," he said.
"I think it’s important to remember that we are countries that are governed by our citizens, not by our experts, certainly not by unelected experts at Swiss ski resorts," Cotton said, referring to Basel, Switzerland, where the FSB is based.