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Insurers Await Regulators' Criteria for Choosing Systemic Firms

Posted on 11 Oct 2011

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U.S. regulators Tuesday will be providing insurance companies, mutual funds and other big players in financial markets a better idea of whether they will be tapped for the same type of additional government scrutiny facing large U.S. banks.

None of these industries are eager to be on the receiving end of the added attention that comes with being named "systemic" and have spent the past year lobbying to be ignored.

The concern is that new scrutiny will mean new restrictions that could hit firms' bottom lines.

Tuesday the Financial Stability Oversight Council is scheduled to release a new proposal on how it will determine which nonbank firms are important enough to the financial system that they merit greater oversight by the Federal Reserve.

Also Tuesday, banking regulators are scheduled to vote on a proposal banning most proprietary trading done by banks, known as the Volcker rule.

Both rules are highly anticipated parts of the 2010 Dodd-Frank financial oversight law.Companies that are tapped for greater Fed supervision will be designated systemically important financial institutions (SIFIs), and will be subject to new capital and liquidity rules.

They will also be required to draft detailed plans on how they could be broken up if the company falters and is seized by the government.

The SIFI rule is in large part a response to the market havoc caused during the 2007-2009 financial crisis by American International Group Inc., an insurer not overseen by banking regulators.

Bank holding companies with more than $50 billion in assets, such as Goldman Sachs and JPMorgan Chase & Co., are automatically subject to the added scrutiny.

For months, insurance, hedge fund, and mutual fund lobbying groups have been working to convince regulators that their industries do not hold the potential to wreak havoc on financial markets.

The Managed Funds Assn., for instance, said in a letter to regulators in February that "it is highly unlikely that any hedge fund is systemically significant at this time."

It is unclear when FSOC will get around to naming SIFIs, but it is not expected before next year.