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Senator Sherrod Brown, who has been mentioned as a possible vice
presidential pick, wrote to Treasury Secretary Jack Lew about
possible threats to the council's regulatory reach in the area.
Lew is the chair of the Financial Stability Oversight Council,
which is made up of the chiefs of the country's financial
regulatory agencies and was formed through the Dodd-Frank Wall
Street reform law in 2010 to head off a repeat of 2008's massive
financial meltdown.
"Shadow banking" usually refers to nonbanking firms carrying out
services similar to those typically offered by banks. Brown
wrote that "a major cause of the global financial crisis of 2008
was the failure, or near-failure, of nonbank financial
institutions."
"Many nonbanks took unacceptable risks prior to 2008 that
resulted in catastrophic losses during the crisis, including
creating dangerous exposures for the regulated banking system,"
Brown wrote, citing bad swaps made by insurer American
International Group <AIG.N> that led to a $182 billion federal
bailout.
Legislation has come up in the last year in both chambers of
Congress that would limit the council's reach.
Meanwhile, a recent legal decision striking down the council's
designation of MetLife Inc <MET.N> as a systemically important
institution - essentially saying the insurer is "too big to
fail" - could threaten the council's regulatory powers. The
federal government is appealing the decision.
Brown wrote that the council has been "analytical and thorough"
in both examining and analyzing financial activities and firms,
but he is concerned about "our ability to address these risks in
the future, leaving our economy vulnerable to another financial
crisis."
He asked Lew a series of questions covering the council's
processes in identifying and monitoring "potential threats
arising from the migration of financial activities to
less-regulated entities," legislation that could impair the
council's response to threats, and additional powers the council
may need.
He also asked if there were additional tools FSOC may need as it
analyzes the use of leverage by hedge funds.
(Reporting by Lisa Lambert; Editing by Jonathan Oatis)
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