FSOC will grant banks hearing process for shedding 'systemic' label

WASHINGTON — The Financial Stability Oversight Council on Tuesday voted unanimously to establish a hearing process for "systemically important" bank holding companies that undergo a restructuring process to help determine whether they should retain their systemic label.

The changes are effective immediately, according to a draft Federal Register notice, but the council will receive public comments on the changes for 30 days after the notice is published officially. The council said it “may make further amendments to reflect any comments received,” according to the notice.

Sections I and VIII of the Dodd-Frank Act give the FSOC the power to designate nonbanks and so-called financial market utilities as systemically important financial institutions — a designation that brings with it heightened supervisory scrutiny from the Federal Reserve and other primary regulators. Dodd-Frank also designated any bank holding company with more than $50 billion in assets, as of Jan. 1, 2010, as a SIFI.

Andrew Harrer/Bloomberg

But Section 117 of Dodd-Frank contemplates that a bank holding company subject to SIFI designation may opt to shed its holding company structure at some point in the future. Any formerly designated bank would automatically retain its SIFI designation, though the restructured former holding company may request a hearing before the FSOC on its future designation.

That provision, known as the “Hotel California” provision in Dodd-Frank, was specifically included to prevent investment banks Goldman Sachs and Morgan Stanley — which had converted to bank holding companies during the financial crisis in order to avail themselves of federal emergency assistance — from converting back once the crisis had faded.

Utah-based Zions Bancorp. announced a plan in November to shed its holding company structure and petition the FSOC for a rescission of its SIFI status. The council’s draft notice says it has changed its hearing procedures to provide a bank seeking to shed its SIFI status under Section 117 a hearing procedure similar to that employed by prospective nonbank SIFIs or FMUs.

“The Council amended the hearing procedures to add hearings conducted under section 117 of the Dodd-Frank Act to the scope of the procedures,” the notice said. “Specifically, the Council amended the definition of ‘petitioner’ … to add a reference to entities that are appealing their treatment pursuant to section 117 of the Dodd-Frank Act.”