Companies such as Prudential Financial Inc. American International Group Inc. and GE Capital could soon find out whether they will face stricter government oversight as policy makers prepare to identify which nonbank financial companies pose a risk to the financial system.
After months of delay, U.S. regulators are poised to finally decide on a first round of nonbank companies to be designated as "systemically important financial institutions," according to a person familiar with the process. The designations are expected to happen in the wake of separate procedural hurdles that the Federal Reserve and the Financial Stability Oversight Council cleared over the past week.
"For the first set of companies, the FSOC's review for proposed designation is drawing to a close," the person familiar with the process said.
The 2010 Dodd-Frank law requires regulators to designate which financial firms should be considered "systemic" and subject them to tougher regulatory scrutiny and higher capital requirements. Banks with more than $50 billion in assets automatically receive the designation.
While officials have declined to identify which concerns are being considered for designation, at least three companies have reached the final stage in the three-step review process. Prudential, AIG and GE Capital all advanced to the third stage, though regulators are considering a number of firms in various stages of the process.
Formally designating a major nonbank could quiet criticism that the FSOC, which consists of top officials from the Treasury Department, Federal Reserve and other regulatory agencies, has not moved fast enough to designate companies that pose a risk and begin taking steps to ensure those companies are properly supervised and capitalized. FSOC officials already missed an informal deadline to complete the first round of designations last year.
Treasury officials have insisted that evaluating the firms and the risks they pose takes time. "This is not a power the council wields cavalierly," Mary Miller, Treasury's under secretary for domestic finance, said in a speech earlier this year.
Regulators have also moved slowly because of concerns that designating a company as "systemic" could result in legal challenges. Last week's steps by both the Fed and FSOC to finalize aspects of the designation process should bolster regulators' legal position in the case of a lawsuit. The Fed on Wednesday finalized its rule setting out which nonbank firms could be eligible for designation, dictating that only firms that derive at least 85% of their revenue or assets from financial operations qualify for consideration. The oversight council on Thursday made amendments to the appeals process companies can use if regulators propose designating them as systemic.