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U.S. Regulators Announce 'Too Big to Fail' Threshold for Non-Bank Firms

Source: RJ Makay

Posted on 13 Oct 2011

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U.S. regulators have proposed a $50 billion asset level as the threshold for non-bank firms such as insurance companies, mutual funds and other big financial institutions to qualify as systematically important financial institutions (SIFIs) and come under additional regulatory scrutiny. This is the same asset threshold that large banks face from Dodd-Frank ‘Too Big to Fail’ legislation.

The proposed criteria stipulated by The Financial Stability Oversight Council (FSOC) also includes whether a non-bank firm has $3.5 billion in derivative liabilities and $20 billion in outstanding loans and issued bonds.

SIFI companies that are selected for greater Fed supervision will be subject to new capital and liquidity requirements.

SIFIs  will also be required to draft detailed plans on how it would be dissolved if the firm went bankrupt and was seized by the government. The naming of SIFI firms is not expected before next year.

Bank holding companies with more than $50 billion in assets, such as Goldman Sachs and JP Morgan Chase, automatically qualify as SIFIs.

Insurance, hedge fund, and mutual fund lobbying groups have been working to convince regulators that their industries are not a threat to wreak havoc on the financial system.

“It is highly unlikely that any hedge fund is systemically significant at this time,” the Managed Funds Association said in a February letter to regulators.

Yesterday, the Federal Deposit Insurance Corporation (FDIC) unanimously approved a notice of proposed rulemaking that implemented the “Volcker Rule” requirements, a key aspect of the 2010 Dodd-Frank law.

The Volcker Rule addresses systemic risk issues that came to the forefront in the wake of the 2008-2009 financial crisis.  It prohibits banks from engaging in any activity that would:

    •    Involve or result in a material conflict of interest
    •    Result in a material exposure to high-risk assets or high risk trading strategies
    •    Pose a threat to the safety and soundness of the banking entity
    •    Pose a threat to the financial stability of the United States

The Volcker Rule bans most forms of proprietary trading to prevent banks from recklessly engaging in activities that could put their entire operations at risk.

Yesterday’s announcement came under fire among industry experts.

“In trying to address the challenging problem of differentiating between market-making and proprietary trading, regulators have proposed a framework which may adversely impact market liquidity, said Securities Industry and Financial Markets Association (SIFMA) president Tim Ryan in a statement today.

“The oversized nature and complexity of this proposed rule will make it unworkable and will further inhibit U.S. banks’ ability to serve customers and compete internationally.” Said Frank Keating, president of the American Bankers Association.

The FDIC will receive comments on its proposed rulemaking until January 2012, and the final rules are scheduled for implementation by July 2012.