US regulators propose set of non-banks for new oversight

Reuters: The US regulators on Monday proposed declaring that certain non-bank financial companies are so large their collapse could destabilise the financial system, in a long-anticipated and controversial move aimed at cracking down on risks to markets.

A final decision by the group of regulators, known as the Financial Stability Oversight Council, to dub companies ‘systemically important’ would trigger extra regulatory scrutiny of those firms by the Federal Reserve.

Regulators have said they will not name the non-bank companies the council is considering until it issues final designations, which could still take several months. American International Group, Prudential Financial and GE Capital, the finance arm of General Electric, have all said they were under consideration.

“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,” Treasury Secretary Jack Lew, who chairs the oversight council, said in a statement.

The 2010 Dodd-Frank law created the risk council and gave it the power to bring big, non-bank firms under the Fed’s oversight after several such companies flirted with failure or had to be bailed out during the 2007-2009 financial crisis.

Dodd-Frank supporters say this would allow regulators to oversee companies based on risk to global markets, rather than only regulating groups of firms with similar activities. Companies tagged for extra oversight would have to participate in regular stress tests, comply with new capital requirements and write living wills, or blueprints for how they could be taken apart if they were to fail.

Critics of the law counter that tagging some companies systemically important could send a message to markets that those companies would be bailed out in a crisis because regulators believe they are ‘too big to fail’.

“Designating any company as ‘too big to fail’ is bad policy and even worse economics,” Representative Jeb Hensarling said, a Texas Republican who is the chairman of the House of Representatives Financial Services Committee, in a statement.

Others have said the extra regulatory scrutiny could put companies at a disadvantage compared to competitors that are not designated. The risk council has so far designated eight large clearinghouses and other firms that handle trillions of Dollars in transactions as systemically important. Observers are closely watching to see which additional firms will be named.

The oversight council is already the subject of a lawsuit, and other challenges could come later. Companies have 30 days after the council votes to contest a proposed designation by requesting a hearing. The council then has 30 days to hold the hearing.