Fed Supervision of Nonbanks Still Up in Air

WASHINGTON — Federal Reserve Board Chairman Ben Bernanke on Wednesday avoided giving specifics on how the central bank will oversee a growing list of nonbank financial companies deemed systemically risky.

Bernanke reiterated that regulators want to examine each firm on a case by case basis in order to determine the best approach to supervision.

"We want to use the word 'tailoring,' because we want to design a regime that is appropriate for the business model of the particular firm," said Bernanke, in a press conference following a two-day Federal Open Market Committee meeting.

American International Group Inc. and GE Capital have already been named by the Financial Stability Oversight Council as systemically important. But other nonbank companies, including Prudential Financial Inc. and MetLife Inc., are likely to be among the next firms that will be supervised by the Fed soon.

Regulators have said systemically important firms will be overseen by the Fed, but not how the central bank will apply tougher capital and liquidity rules to these nonbank companies. While AIG and GE Capital have already fallen under the Fed's purview because they own banking subsidiaries, insurance companies like Prudential will likely be more complicated to regulate.

Bernanke acknowledged that in the case of AIG and GE Capital Fed supervisors have a "lot of experience with those firms and a lot of contact with those firms."

The central banker said that the "primary goal of consolidated supervision by the Fed is to make sure the firm doesn't in any way endanger the stability of the broader financial system."

But he said regulators would be looking beyond the usual "safety and soundness" measures and examining specific assets and liabilities of individual firms, including its derivatives exposures.

The lack of clarity on how such firms will be regulated has been a chief criticism of the process designed under the Dodd-Frank Act to prevent systemically important firms from harming the economy if they become troubled.

AIG, GE Capital, and Prudential were all notified in June that they would be designated as risky firms. Prudential was the only one among the firms to challenge the council's decision.

The appeal by the Newark, N.J.-based company set off a process that allowed it a second chance to plead its case to regulators that it should not be designated. Regulators are nearing a 60-day deadline that expires on Sept. 23 to make a final determination on the insurance company.

FSOC is expected to stick to its June decision to name the firm as systemically risky, which will open up tough questions for the Fed to detail how it plans to supervise the firm.

The Fed has already postponed offering further clarity by agreeing to delay any decision on how capital rules would affect insurance-related holding companies in a final rule released in June implementing general capital standards under Basel III.

Separately, Bernanke acknowledged that regulators have made a lot of progress in making the financial system safer since passing Dodd-Frank, but was careful to note that more progress still needs to be made.

"I don't want to overstate the case," said Bernanke. "I think there's a lot more work to be done."

The Fed chairman said large banking companies hold significantly higher capital and are now subject to regulatory stress tests. He also pointed to progress made toward resolution planning, which the United States has taken the lead on. Still, he said regulators were not yet finished.

"We're still some distance from being fully geared up to work with foreign counterparts to successfully wind down an international multinational firm," said Bernanke. "We made the progress in that direction, but we need to do more, I think."