Barney Frank criticises risk retention easing; reassures on SIFI

The former chairman of the House Financial Services Committee said certain safeguards have been diminished since he left his post and expressed doubts that asset managers will be labelled ‘systematically important’.  

Speaking at Private Equity International’s CFO/COO Forum in New York on 21 January, Barney Frank, a driving force behind the Dodd-Frank financial reforms, told some 500 attendees that certain risk retention rules have gradually been loosened in implementation, which he said is a mistake.

He explained that the rules were designed to force firms packaging loans to keep some exposure to the assets, rather than selling them all off.

The Federal Deposit Insurance Corporation, the Federal Housing Finance Agency and the Office of the Comptroller of the Currency published the final credit risk retention requirements in October.

Frank said the final version was less stringent than what he originally conceived, pointing out that risk retention does not apply to residential mortgages. “They softened some of these rules, and I wish they wouldn’t,” he said.

Even though Frank himself is no longer on the committee, he hopes the current regulators will revisit the issue.

In his keynote speech at the Plaza Hotel on Wednesday morning, he also addressed the SEC’s Financial Stability Oversight Committee, which may designate certain large insurers and asset managers ‘systematically important financial institutions’ or SIFIs. The label would make them subject to greater scrutiny and restrictions, potentially similar to those that already apply to banks.

The SEC has already slapped this label on some insurers, including MetLife which has publicly fought back. It is also considering assigning it to some asset managers, though Frank said that this is unlikely, even for the very largest firms.

Responding to a question from the audience on whether managers engaged in private lending could be labelled SIFIs, Frank said it’s unlikely but “that’s one of the reasons for the [regulatory] reporting [requirements] that you think [are] a pain in the ass”, he told a room full of alternative investment firms, referring to mandatory SEC filings. He explained that the watchdogs need more clarity on what these firms actually do.

One of these firms “probably can’t become a behemoth like Citi, but they [the regulators] still want to make sure that everyone doesn’t rush to the same side of the boat at the same time and tip it over,” said Frank.