By Jenna Greene
Members of the House Committee on Financial Services pressed the top lawyer from the Federal Reserve about when and how the government could break up financial institutions–and seemed less than satisfied with his answers.
During an April 16 hearing, committee members grilled Federal Reserve General Counsel Scott Alvarez on how regulators would decide whether a megabank posed “a grave threat to the financial stability of the United States.” Such a determination under Section 121 the Dodd-Frank Act gives the government the power to force the bank to sell assets or to break the bank up into pieces.
The problem for some lawmakers is that the Federal Reserve has not defined what constitutes a “grave threat,” and according Alvarez, it is not likely to do so. “That would be a determination that would depend very much on the facts and circumstances of the case,” he said. “It is very difficult to have a uniform rule.”
That didn’t sit well with Representative Sean Duffy (R – Wis.). “You don’t have standards, you don’t have metrics…and you have no intention of setting standards,” he said. “If we want to breed stability in the sector, certainty within the sector, does your standard ‘I’ll know it when I see it’ breed that?”
Alvarez answered, “Stability gets built by the other pieces of Dodd-Frank we’re putting together—the enhanced prudential standards, the capital requirements, the liquidity requirements, by building up and working out details of the orderly liquidation authority.”
Alvarez also came under fire by Representative Dennis Ross (R – Fla.). “It’s more or less a game-time decision to determine whether a grave threat exists?” he asked. “You determine based on, I guess, discretion at the moment—that what may be considered a grave threat today may not be a grave threat tomorrow."
He warned: "It will be a situation of too late to save, because you’re not going to be able to save these institutions if you have no standards in place by which they know how to correct what they don’t even know is incorrect.”
With limited success, Alvarez attempted to reassure lawmakers by reminding them that it’s “a high hurdle” to determine that a company poses a grave threat, requiring a “yes” vote by two-thirds of the members of the Financial Stability Oversight Council, which includes the heads of the nine federal financial regulators including the Treasury Department, the Comptroller of the Currency and the U.S. Securities and Exchange Commission as well as an independent member with insurance expertise.
In response to a question from Representative Ann Wagner (R – Mo.), Alvarez agreed that the grave threat determination under Section 121 isn’t limited to firms on the verge of collapse. “It can apply to an institution that is healthy and not failing,” he said.
Wagner compared Section 121 to the Sherman Antitrust Act, but Alvarez noted that the Sherman Act is forward-looking, whereas the grave threat determination requires that the company “actually pose a grave threat,” not that it might do so in the future.
A concern of Representative Patrick McHenry (R – NC), who chairs the Oversight and Investigations subcommittee that held the hearing, is that regulators “can use this authority outside of moments that are a financial crisis.”
Yes, Alvarez responded. “Section 121 does not impose requirements that we can only use it in financial crises. It’s very open-ended.”