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Financial Regulators to Provide Clarity on Identifying Systematically Important Firms

Source: WSJ - Deborah Solomon & Victor McGrane

Posted on 13 May 2011

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As a result of congressional pressure, financial regulators  promised to provide more clarity about how they will determine which large financial firms should face stricter capital standards and regulation.

At a Senate Banking Committee hearing on Thursday Deputy Treasury Secretary Neal Wolin told lawmakers that regulators will provide additional guidance on the approach to designating which firms could have a systemic impact on the financial system if they run into trouble. He also said regulators would give the public more time to comment on the criteria, which could delay the government's decision.

Regulators still are debating which financial firms, specifically those that aren't banks, will get the label "systemically important." Several officials have said they believe only a small number initially will be designated as "too big to fail."

The Dodd-Frank financial-overhaul law automatically designates banks with $50 billion or more in assets as systemically important, but gives regulators authority to decide which nonbank financial firms pose risks.

Some regulators want a larger number of nonbank firms, such as hedge funds, mutual funds and insurance companies, to provide data to regulators even if they escape the systemic designation.

Federal Deposit Insurance Corp. Chairman Sheila Bair, in testimony before the Senate panel, said regulators "need to be able to collect detailed information on a limited number of potential [firms] as part of the designation process." She said firms that are asked for additional information shouldn't assume they will be designated as systemically important, but said regulators face a potential blind spot in not having more information about their operations.

The designation process aims to prevent a repeat of the financial crisis by requiring firms that pose risk to hold more capital and be subject to more oversight.

Systemic firms also will have to provide regulators with a "living will," spelling out how they could be dismantled.

Companies that potentially might be labeled systemically important include General Electric Co. unit GE Capital and insurers American International Group Inc. and Prudential Financial Inc.

The Independent Community Bankers Association has suggested other firms be tagged with the designation, including private-equity firms Blackstone Group LP, Carlyle Group LLC and KKR & Co.

A spokesman for GE Capital said "we have a strong capital and liquidity position, and our businesses are performing well. We will have to wait and see the criteria and who [regulators] ultimately designates as systemically important."

AIG Chief Executive Robert Benmosche said on a conference call last week that his "sense would be that we will be regulated by the Fed" at the holding company, while state regulators will continue to regulate the insurance subsidiaries. An AIG spokesman declined to comment.

"We respectfully disagree with their conclusion," said Peter Rose, a spokesman for Blackstone.
Prudential spokesman Bob DeFillippo said it was premature to discuss whether it would be designated as systemically important.

Representatives for KKR and Carlyle declined to comment.

Any attempts by regulators to collect additional data from nonbank financial firms, such as hedge funds or private-equity shops, could trigger a backlash. It has taken years for the government to get hedge funds to register as investment advisers with the Securities and Exchange Commission, a move that was subject to fights and lawsuits.

Lawmakers on both sides of the aisle have criticized the Financial Stability Oversight Council's decision-making process as opaque, saying a proposal released this year did nothing to help people understand what criteria the government would consider.

The council was created by the Dodd-Frank law to help coordinate rule making and monitor systemic risk.

"Unfortunately, the council has not yet released for public comment the detailed rules on how they will designate firms… . As a result, there is a great deal of confusion about how the council will proceed with its rule making," Alabama Republican Sen. Richard Shelby said in his opening statement.

At the hearing, Federal Reserve Chairman Ben Bernanke agreed more detail was needed, but said the decisions will ultimately involve judgment calls.

"I think ultimately we're going to have to look at a whole variety of issues, which cannot always be put into a numerical metric," he said.