–Financial Stability Oversight Council Meeting Begins 2:30p ET

By Denny Gulino

WASHINGTON (MNI) – The afternoon meeting of the Financial Stability
Oversight Council is a sure sign that costly capital requirements are
closer for many large firms that sell financial services, like insurance
companies, but aren’t already as heavily regulated as banks.

The Council vote is expected to set in place the final criteria by
which the government will decide which of the largest non-banks will be
forced to adhere to costly capital standards and many other requirements
already covering banking.

With a rule in place, those non-bank firms considered systemically
important enough to qualify, to be known as “SIFIs,” will then be
individually named by the end of the year. The challenges to that
designation may linger for years in the courts.

The Council, better known as FSOC, is the most powerful
manifestation of the Dodd-Frank Act, packed with government regulators
from Federal Reserve Chairman Ben Bernanke and Chairman Treasury
Secretary Tim Geithner to the FDIC, the SEC, the CFTC, the NCUA, the OCC
and the CFPB, all acronyms already well known to banks.

The Council can designate as a SIFI any firm it decides is large
enough and potentially risky enough to be a threat to the financial
system, including some of the largest in the so-called shadow banking
sector.

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.
Dodd-Frank 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.

The Council meeting begins at 2:30 ET and while the outcome appears
to be assured — a final rule that allows non-banks to be forced into
the government’s capital standards and other requirements — every
lobbyist and top executive in the financial services industry will be
watching closely for any crucial nuances and changes.

The Council could also establish public hearings on the criteria,
as a consortium of business groups is demanding.

Monday’s notice of the afternoon FSOC meeting took many industry
watchers by surprise, since it was expected to happen later in the year,
perhaps by early summer. The announcement was taken as a signal that
behind the scenes the details of the new rule have been settled and the
probable votes counted. The Council has been working on the rule since
late 2010.

Although the broad criteria to be swept into the regulatory arena
were posted months ago, they are not final until the vote is taken.
Small changes could decide the regulatory fate — and influence the
stock price — of some the largest firms which are on the margins of the
rule’s universe.

There are 14 members of the Council but not all have votes.
Non-voters include some who few in Washington have ever heard of, like
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 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. Under the
law they will get a chance to voice their objections after being told
they are likely to be designated. The Council must vote twice in order
for any firm to be designated as systemically significant.

Under criteria last tweaked in December, the non-bankers who
qualify as systemically important institutions — and will face new
mandated capital standards and the need to write their own “living will”
in case they need to be extinguished — will have more than $50 billion
in assets and 85% of their business in financial services — and any one
of a number of other characteristics.

Those include a 15-to-1 or greater leverage ratio, $3.5 billion in
derivative contract liabilities, $30 billion or more in gross notional
credit-default swaps exposure, or a 10% or greater ratio of short-term
debt to assets.

Expensive capital standards and the “living will” are at the top of
the list of new requirements that also includes liquidity standards,
credit exposure standards, stress test requirements, risk management
oversight and the ability to make in-course corrections upon
notification from the regulators.

Insurance industry associations and business groups like the U.S.
Chamber of Commerce and the National Association of Manufacturers are
arguing for narrower requirements that would exclude as many of their
members as possible. Some other groups argue that the FSOC criteria will
not be expansive 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.

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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