By Denny Gulino
WASHINGTON (MNI) – Ushering in a new era of financial services
regulation in the U.S., the Financial Stability Oversight Council
Tuesday approved the criteria it will use to identify non-bank firms
that it believes could or might someday endanger the financial system —
and then reserved the right to ignore the criteria.
The vote by the members of what has come to be known as “FSOC” was
unanimous to list certain characteristics the Council will “generally”
use to choose firms for a new and already abhorred status most of the
target firms would mostly rather avoid.
Once designated a systemically important financial services firm
after a three-stage process, the new “SIFI” gets a costly set of
mandates. There will be minimum capital standards, stress tests,
liquidity standards and much more.
The “interim interpretive guidance for non-bank designations”
emphasizes flexibility and foresees the need to learn from experience.
The new rule is “an important tool provided in Dodd-Frank for
extending the perimeter of transparency, oversight and prudential
supervision,” Treasury Secretary Tim Geithner told the Council,
assembled under three of the largest chandeliers in Washington in
Treasury’s marble-lined Cash Room.
Geithner said, though, that the authority under the new rule is
only “one tool, not our sole means for extending the perimeter of
supervision.”
For those firms covered, however, the rule represents the threat of
an unfamiliar government yoke that can alter their business models,
impair their stock price and subject them to sudden orders to alter
behavior the Council disapproves of.
For that reason some firms and their various industry associations
are expected not only to argue against any SIFI designation, and the law
provides such opportunities, but to challenge any designations in court.
In the political sphere, the Dodd-Frank Act that created the FSOC
is under constant challenge on Capitol Hill by some Republicans as too
burdensome and intrusive an intervention in business by government.
The final rule’s criteria for the SIFI designation will be matched
against firm after firm in the months ahead. They will help identify the
obvious candidates but in the end, all that matters is whether “the
Council believes the company could pose a threat to U.S. financial
stability,” in the words of an FSCO guidance document.
The final rule provides for the Council to be able to designate
just subsidiaries of firms if the parent itself is not primarily a
financial services company. And in judging a foreign-owned company, the
Council will consider only the U.S assets, liabilities and operations.
FSOC Tuesday retained the proposals of late last year for
previously unregulated money market funds, broker-dealers, derivatives
markets, insurance firms, hedge funds, private equity firms, investment
advisers, asset managers — but not securities exchanges — to be
considered for the expanded net of heavy regulation. Estimates vary as
to the universe of non-bank SIFIs that will eventually be named by the
end of the year but have been in the neighborhood of two to three dozen.
The Council will begin the assessment process by first asking the
appropriate regulatory agency for data and then the firm itself if there
are $50 billion in global assets and the entity meets or exceeds:
— $30 billion in gross notional credit default swaps
— $3.5 billion derivative liabilities
— $20 billion of total debt
— A 15-to-1 leverage ratio
— A 10% ratio of debt with less than 12-months maturity to total
assets
Every non-bank financial services entity — including those
middlemen known in the law as “financial market utilities” — now falls
under the authority of the Council and one of eight regulatory agencies,
including the Fed, represented on the Council by Chairman Ben Bernanke.
He, incidentally, left all the talking to the chairman of the Council,
Geithner.
The FSOC sealed off from public scrutiny the materials it will use
in assessing a firm for SIFI status, making them exempt from Freedom of
Information Act queries.
The FSOC incorporated in its rule some suggestions that it should
emphasize flexibility in making its judgments rather than establishing
“bright line” guidelines quantifying exactly what characteristics define
a SIFI.
The Council is already the most powerful manifestation of the
Dodd-Frank Act, packed with government regulators like the FDIC, the
SEC, the CFTC, the NCUA, the OCC and the CFPB, all acronyms already well
known to banks. As it summons financial services firms to explain
themselves, its footprint in the financial services sphere can only
grow.
Geithner recounted how the congressional creators of Dodd-Frank
were alarmed that the unregulated financial sector had slowly grown to
be nearly a third of the financial services industry by the time the
crisis struck. So Congress both beefed up the government’s regulatory
capabilities, creating the Council and several other new coordinative
entities like the separate Federal Insurance Office, and widened the
regulatory net to reach the non-banks. It wasn’t long after passage that
Republican leaders began to have buyers’ regret, becoming critical of
the far-reaching legislation.
Monday’s notice of the Tuesday afternoon FSOC meeting took many
industry watchers by surprise, since it was expected to make its SIFI
rule final later in the year, perhaps by early summer.
There are 14 members of the Council but not all can vote.
Non-voters include Louisiana Banking Commissioner John Ducrest, voted on
to the FSOC as the representative of all state bank regulators. Ducrest
is the new chairman of the Conference of State Bank Supervisors.
There are also representatives of state insurance regulators and
state securities regulators.
Another little known member, but one who does have a vote, is Roy
Woodall, an advisor to the Council because of his expertise in
insurance. A former head of industry groups and an insurance consultant
for the Congressional Research Service, he had to be confirmed by the
Senate to a six-year term.
Some insurance companies and firms are so large that they already
know FSOC will be knocking at their door. But many companies are on the
borderline of the criteria and are girding themselves to argue against
being included, for some, even if it means a fight in the courts. The
Council must vote twice in order for any firm to be designated as
systemically significant with two-thirds approval, including that of the
chairman, necessary.
Insurance industry associations and business groups like the U.S.
Chamber of Commerce and the National Association of Manufacturers argued
for less Council discretion and narrower requirements that would exclude
as many of their members as possible. Some other groups, however, have
argued that the FSOC criteria are not inclusive enough, and will let
many types of firms involved in the financial crisis off the hook.
The Council must meet at least quarterly under the law. Its work is
being monitored closely by foreign regulatory groups still struggling
with similar criteria for capital standards and non-banks. The G20’s
Financial Stability Board is in the midst of studying to what extent
insurance firms should be included. Those firms considered to be SIFIs
by FSOC could theoretically be subject to another layer of international
regulation and harmonization of the standards is still far in the
future.
Although firms that limit themselves strictly to financial services
can meet the new criteria if they are large and potentially risky
enough, firms that are not immediately recognizable as such could also
find themselves in the Council’s cross-hairs. Some have suggested the
firms such as Warren Buffett’s Berkshire Hathaway, and even
manufacturers with big finance operations could find themselves
answering the FSOC questions.
One insurance company already under the Fed’s regulatory scrutiny
because its banking operations, Met Life, found out how uncomfortable
that scrutiny can be. It complained about the Fed’s March 13 stress
tests results for the 19 largest banks that found it did not yet measure
up to most of its peers. Met Life said the Fed’s criteria were
inappropriate for an insurance operation.
** MNI Washington Bureau: 202-371-2121 **
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