FSOC Names Systemically Risky Nonbanks

WASHINGTON — The Financial Stability Oversight Council took another step Monday toward naming certain nonbank companies as potential threats to financial stability.

In a closed-door meeting, the council, headed by Treasury Secretary Jacob Lew, voted to identify an initial batch of nonbank financial firms as a risk to the financial system. Those firms have been under consideration by the council since September.

Although the council did not name the firms, American International Group, Prudential Financial and GE Capital separately confirmed they were identified as systemically risky by the council.

"The council has made significant progress over the last two years in making our financial system safer, stronger and more resilient," said Lew in a press release. "Today, the council took another important step forward by exercising one of its principal authorities to protect taxpayers, reduce risk in the financial system, and promote financial stability."

Each firm is considered and evaluated separately by the council, whose voting members include Federal Reserve Board Chairman Ben Bernanke and Federal Deposit Insurance Corp. Chairman Martin Gruenberg. In order to be initially designated, it required two-thirds of a majority vote from the council as well as an endorsement by Lew.

The vote now triggers a process that could last up to 120 days before a final designation by the council can be made.

Each company is given a 30-day window to object to the designation by regulators. The council is then required to schedule a nonpublic hearing within 30 days, after which it has another 60 days to make a final decision.

Alternatively, if a company tells the council it will not request a hearing, the council is required to make a final designation within 10 days. In the event the company does not request a hearing or does not tell the council that it will not request a hearing, the council must make a final decision within 10 days after that 30-day window has expired.

Once designated by the council, firms will face a tougher set of supervisory standards and be required to prepare and file a plan with regulators detailing how to safely unwind the company if it's on the brink of failure. It's unclear exactly what additional capital and liquidity requirements those nonbank firms would face under the Fed's supervision.

The process has come under some criticism given that the new capital requirements that the firms will be subject to have yet to be finalized by the Fed. In December 2011, the Fed proposed a batch of stringent capital and liquidity rules for bank holding companies with more than $50 billion in assets, which have yet to be finalized.

"Until the Federal Reserve finalizes the rule defining what systemically important financial institutions will be subjected to, it is premature for the FSOC to move forward with designations," said David Hirschmann, president and CEO of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, in a statement. "Without knowing the consequences, how can regulators tell if designation is the most prudent option for the company?"

Sen. Jack Reed, D-R.I., raised the issue directly with Lew at last month's Senate Banking Committee hearing.

Lew told lawmakers the first step would be figuring out which firms should be designated as systemically important, but noted that the responsibility of regulating such firms would fall to the Fed.

"The Federal Reserve Board would have substantial responsibility in this area," said Lew. "I know that these are the questions that have been raised as to whether or not the tools are perfectly fitting for nonbanks, and I think that's an issue that they will look at it and we will look at it designations are made."

The Fed has said it would tailor the rules to accommodate the differences between traditional bank holding companies versus nonbank firms, like insurance companies.

"We understand that there are some nonbank companies for which the banklike standards that we've proposed would likely be a bad fit," said Michael Gibson, director of division of bank supervision and regulation for the Fed, before a House Financial Services subcommittee last year. "And we have committed to looking at that when those companies are designated and doing what we can to tailor the standards. However, there are some other companies that could be designated that are not that different from a bank. And for those companies, we would expect that the banklike standards we have would require less tailoring."