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Mnuchin: AIG's downfall avoidable if regulators had 'activities-based' oversight

American International Group Inc.'s collapse during the financial crisis would have been avoided if a group of the top U.S. financial regulators had the power to oversee risky activities, U.S. Treasury Secretary Steven Mnuchin told members of Congress.

Mnuchin, testifying before the House Financial Services Committee on May 22, defended the Financial Stability Oversight Council's recent proposal to shift how nonbank financial institutions are regulated as "too big to fail."

"Because of the way we're looking at it, we would have picked up AIG in their risk associated with credit default swaps," Mnuchin said. "That's the type of activity under our new rules that we would indeed pick up."

The council, which includes the heads of every federal financial regulatory agency, has been working to finalize a rule that would change how nonbank financial institutions such as insurers and asset managers are designated and regulated as systemically important financial institutions.

The new approach directs the council to identify risky activities that a company is involved in, and then passes the responsibility to resolve those issues to the company's primary regulator. While a company could still be named "too big to fail," the proposal draws out the process by adding additional steps, analysis and regulators.

Mnuchin, who chairs FSOC, deflected criticism of the idea from Democratic members who argued the proposal curbs the council's ability to stem systemic risk when it arises. Members drew similar objections to the rule as those voiced in a recent letter from financial crisis-era regulators who wrote that FSOC's proposal will "neuter" its ability to stem threats to the financial stability of the economy.

"Nonbanks would have to demonstrate a high likelihood of distress before they are more highly scrutinized, a very high bar that nonbanks will likely fail to meet until their impending collapse," Rep. Jesús García, D-Ill., told Mnuchin during the hearing.

García also raised the issue of leveraged lending to Mnuchin, which the lawmaker said is a rising risk to the financial sector.

The secretary said the rising levels of leveraged debt held by financial institutions is "not a concern" for his department, although he and his fellow regulators are "closely" monitoring the space.

Mnuchin's comments reflect those of other financial regulators who in recent weeks have downplayed the effects leveraged lending has on banks.