HFS Subcommittee Discusses SIFI Designations
AT TODAY’S HOUSE FINANCIAL SERVICES SUBCOMMITEE on Financial Institutions and Consumer Credit hearing, lawmakers discussed the impacts systemically important financial institution (SIFI) designations would have on individual firms and the marketplace. Officials from the Federal Reserve and the Treasury Department testified as well as a panel of industry stakeholders and academics.
The Dodd-Frank Act authorized the newly-established council of regulators, the Financial Stability Oversight Council (FSOC), with the power to designate firms that pose a threat to the financial system as a SIFI and subject those firms to heightened prudential and supervisory powers.
In their opening statements, lawmakers on both sides of the aisle voiced concern over large financial firms that are perceived by the market as “too big to fail.”
Rep. Scott Garrett (R-N.J.) called the entire SIFI debate a “charade” and suggested that discussions should center on how to end too big to fail and the moral hazard it poses.
Rep. Ed Royce (R-Calif.) said Section 165 of Dodd-Frank, which subjects certain nonbank financial firms to heightened regulatory standards, will “publicly stamp” institutions as systemic which in turn will send a message to the markets that “Washington will never allow these firms to fail.” With regard to the impending designations, Royce stated his hope that regulators “cast the smallest possible net and designate only the firms that everyone agrees are too big to fail,” but said the overall approach was the wrong direction.
Rep. David Scott (D-Ga.) cautioned that new regulation must be implemented appropriately to ensure that the “forces that generate the capital, that disburse the capital, that lend and keep this economy going” are not put in “straight jacket.”
Testimony
In his opening statement, Lance Auer, Deputy Assistant Treasury Secretary for Financial Institutions, outlined the three stage process for SIFI designations. Auer said stage one is not intended to identify nonbank financial companies for a final determination. He noted how a nonbank financial firm will warrant further evaluation beyond stage one if it has at least $50 billion in assets and: $20 billion of total debt outstanding; 15 to 1 leverage ratio; and 10 percent ratio of short-term debt to total consolidated assets, among other things. Companies that reach stage two will be analyzed based on a six-category framework. Based on this analysis, the FSOC will contact only the firms that it believes merit further consideration in stage three. According to Auer, the objective of the stage 3 analysis is to assess whether a nonbank financial company meets one of the statutory standards for a determination or “whether the company’s material financial distress, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the company, could pose a threat to U.S. financial stability.” Auer emphasized that “every designation decision will be firm-specific, and every firm will receive robust due process protections, including the opportunity for judicial review of any final designation.”
In his opening statement, Michael Gibson, Director of the Division of Banking Supervision and Regulation at the Federal Reserve, provided an overview of the Federal Reserve’s work to date on the designation and supervision of nonbank financial companies that could pose a threat to financial stability. Gibson referred to the Federal Reserve’s proposed rules that would apply the same set of enhanced prudential standards to covered companies that are bank holding companies and nonbank financial companies designated by the FSOC, and said the Fed may “tailor the application of the enhanced standards to different companies on an individual basis or by category, taking into consideration each company’s capital structure, riskiness, complexity, financial activities, size, and any other risk-related factors that the Federal Reserve deems appropriate.” He said that once the FSOC designates one or more nonbank financial firms, the Fed is “committed to thoroughly assessing the business model, capital structure, and risk profile of each designated company and tailoring the application of the enhanced standards to each company on an individual basis or by category, as appropriate.”
In his opening statement, Thomas Quaadman, Vice President of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce, noted that with regard to the designation process, the Federal Reserve and the FSOC are not following the structure Congress passed into law. Quaadman recommended the FSOC increase transparency with regard to its proceedings on legislative matters and noted how the FSOC did not provide a cost-benefit analysis in the rulemaking process to allow stakeholders to determine the impacts of the proposed regulations.
In his opening statement, William Wheeler, President, Americas, for MetLife, discussed why regulated insurance activities generally do not pose systemic risk and why naming only a few insurance companies as SIFIs would “needlessly upset the competitive landscape in the insurance sector.” Wheeler also discussed why prudential regulation must be tailored to MetLife’s unique asset and liability characteristics in the event it is designated as a SIFI.
Question and Answer
Subcommittee Chairman Shelley Moore Capito (R-W.Va.) asked the regulators how they will assess differences in the industry business models with regard to the designation process.
Auer said the FSOC developed a three stage framework for the designation process. The first stage uses uniform quantitative thresholds to screen out “the large number of firms that the council is unlikely to consider for further evaluation.” The next two stages will take an “individualized look at each particular nonbank financial company under consideration to look at all of its activities, all of its businesses, the types of business it is in, the types of activities it engages in” so that the FSOC can take into account the specific factors of that firm in coming up with a final determination.
Gibson stated the Fed’s intent in its proposal for enhanced prudential standards to tailor the standards to the characteristics of the companies that are designated by the FSOC. “We understand that there are some nonbank companies for which the bank-like standards that we’ve proposed would likely be a bad fit. And we have committed to looking at that when those companies are designated and doing what we can to tailor the standards,” Gibson said.
Rep. Carolyn Maloney (D-N.Y.) asked for more clarity regarding the designation criteria and specifically asked how much interconnectedness makes a firm a SIFI.
Auer reiterated the FSOC’s designation process and said interconnectedness is one factor of many that the Council will take into consideration. He said interconnectedness will be assessed on a firm-by-firm basis.
Maloney asked Gibson whether the Federal Reserve’s prudential standards proposal for SIFIs will be modified to adapt to the distinct profile of non-bank SIFIs.
Gibson said the Fed is currently reviewing comments from its proposed rule released last December. He said he could not predict where the final rule will come out but did state that the Federal Reserve is “committed, after the companies are designated, to take a look at the need for tailoring the standards.”
Maloney also asked for clarity regarding the timing of the designations and when the Federal Reserve will develop prudential standards for nonbank financial firms.
Auer said the Treasury Secretary hopes the FSOC will begin the first of its designations “sometime this year.” Gibson said the Fed is still reviewing comments from its proposed rule.
Full Committee Chairman Spencer Bachus (R-Ala.) asked if there was any recognition that the proposed standards do not appear to fit asset managers, money markets, captive finance companies or insurance companies.
Gibson noted that with regard to certain non-bank financial firms, such as asset management and captive finance companies, the Federal Reserve would “certainly have to look at the need to tailor the standards that are in the proposed rule to the specific characteristics of those companies. And as you point out, an asset management company is very different from a bank because the assets it’s managing are not on its own balance sheet. They’re held in custody for customers, so that’s an important difference.”
“We have experience with asset management companies because there are large bank holding companies that are significant participants in asset management. But we don’t have the experience of writing capital and other prudential standards for a company that only engages in asset management. And that is what we would need to tailor. If and when those companies are designated, we would tailor the standards,” Gibson said.
Rep. James Renacci (R-Ohio) noted the confusion stemming from what it means for a nonbank financial company to be engaged in a financial activity under Title I of Dodd-Frank and asked whether the confusion will be resolved before the designation process is underway.
Gibson said the Federal Reserve issued a supplemental proposal last month to clarify certain aspects of that definition but said the FSOC does not believe they have to wait until the Federal Reserve’s final rule to designate companies. He said the Fed “defined as financial in nature activities that are referenced in certain sections of the law that defines what activities are permissible for a bank holding company. And by referring to that section of the law we’re incorporating the existing definitions of what is a financial activity into this definition of nonbank financial company.”
Scott asked if the FSOC has conducted a thorough cost benefit analysis on the designation of nonbanks as systemically important, specifically with regard to asset managers.
Auer said the “FSOC member agencies are obviously very concerned about the costs and benefits of their actions” but that the rule was designed to provide greater clarity about the Council’s designation process.
Scott asked if the FSOC has considered any adverse effects of the designation, specifically noting that asset managers do not invest with their own balance sheets, and asked where the process will end and whether other nonbank industries will be considered systemic as well.
Auer said the designation process will be undertaken on a firm-by-firm basis. Auer said asset management firms would unlikely be designated to the degree that such firms have their activities in custody and on behalf of customers and, as a result, do not pose a threat to financial stability.
Rep. Michael Grimm (R-N.Y.) asked if asset managers have been involved in the Office of Financial Research (OFR) study to date and if there is a formal process for conducting the due diligence for asset managers.
Auer said the OFR has “begun the process of talking with people in the asset management industry and will continue to do so.” He said any “asset management firm or any entity that wants to meet with the council staff or member agency staff about the designations process is welcome to contact any council member agency and we will try — or the OFR — will try and set up meetings for that firm.”
Grimm responded by noting that when a client changes an asset manager that does not mean that the portfolio is immediately liquidated and stated his hope that “the FSOC is looking at that and that there certainly would be adverse effects. I wish they would certainly consider that.”
Rep. John Carney (D-Del.) asked for more clarity regarding the designation process.
Auer said the FSOC’s final rule took effect this month and that the member agencies and the OFR are currently collecting data to assess which firms will pass the stage one threshold. He said stage two is designed around a six-factor framework that relate to the “probability that a firm might get into distress,” including leverage, liquidity, lack of substitutes, interconnectedness, size, and existing regulatory scrutiny. Auer said firms will be notified in stage three that they are under consideration by the FSOC. The firm will then have the to opportunity to provide information or arguments to the Council in support or opposition to the designation. If the FSOC decides to vote for a designation, the firm can then request a hearing in front of the Council. If the Council decides to approve the designation then the firm can appeal to the federal system.
Rep. Patrick McHenry (R-N.C.) asked if the Federal Reserve conducted cost-benefit analysis on its counterparty credit limit proposal.
Gibson said the Federal Reserve looks at the costs and benefits of every rule and that it is still gathering information on the particular counterparty credit limits that were proposed and the alternatives that were suggested by the commenters.
During the second panel, Renacci asked Wheeler how SIFI designations for certain insurance firms would affect the insurance sector.
Wheeler said such firms will be seen as “insurance firms you do not want to buy stock in.” He noted how these firms would be subject to higher capital requires, which would increase costs, and posited that the marketplace would punish those firms.
For testimony and a webcast of the hearing, please click here.
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AT TODAY’S HOUSE FINANCIAL SERVICES SUBCOMMITEE on Financial Institutions and Consumer Credit hearing, lawmakers discussed the impacts systemically important financial institution (SIFI) designations would have on individual firms and the marketplace. Officials from the Federal Reserve and the Treasury Department testified as well as a panel of industry stakeholders and academics.
The Dodd-Frank Act authorized the newly-established council of regulators, the Financial Stability Oversight Council (FSOC), with the power to designate firms that pose a threat to the financial system as a SIFI and subject those firms to heightened prudential and supervisory powers.
In their opening statements, lawmakers on both sides of the aisle voiced concern over large financial firms that are perceived by the market as “too big to fail.”
Rep. Scott Garrett (R-N.J.) called the entire SIFI debate a “charade” and suggested that discussions should center on how to end too big to fail and the moral hazard it poses.
Rep. Ed Royce (R-Calif.) said Section 165 of Dodd-Frank, which subjects certain nonbank financial firms to heightened regulatory standards, will “publicly stamp” institutions as systemic which in turn will send a message to the markets that “Washington will never allow these firms to fail.” With regard to the impending designations, Royce stated his hope that regulators “cast the smallest possible net and designate only the firms that everyone agrees are too big to fail,” but said the overall approach was the wrong direction.
Rep. David Scott (D-Ga.) cautioned that new regulation must be implemented appropriately to ensure that the “forces that generate the capital, that disburse the capital, that lend and keep this economy going” are not put in “straight jacket.”
Testimony
In his opening statement, Lance Auer, Deputy Assistant Treasury Secretary for Financial Institutions, outlined the three stage process for SIFI designations. Auer said stage one is not intended to identify nonbank financial companies for a final determination. He noted how a nonbank financial firm will warrant further evaluation beyond stage one if it has at least $50 billion in assets and: $20 billion of total debt outstanding; 15 to 1 leverage ratio; and 10 percent ratio of short-term debt to total consolidated assets, among other things. Companies that reach stage two will be analyzed based on a six-category framework. Based on this analysis, the FSOC will contact only the firms that it believes merit further consideration in stage three. According to Auer, the objective of the stage 3 analysis is to assess whether a nonbank financial company meets one of the statutory standards for a determination or “whether the company’s material financial distress, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the company, could pose a threat to U.S. financial stability.” Auer emphasized that “every designation decision will be firm-specific, and every firm will receive robust due process protections, including the opportunity for judicial review of any final designation.”
In his opening statement, Michael Gibson, Director of the Division of Banking Supervision and Regulation at the Federal Reserve, provided an overview of the Federal Reserve’s work to date on the designation and supervision of nonbank financial companies that could pose a threat to financial stability. Gibson referred to the Federal Reserve’s proposed rules that would apply the same set of enhanced prudential standards to covered companies that are bank holding companies and nonbank financial companies designated by the FSOC, and said the Fed may “tailor the application of the enhanced standards to different companies on an individual basis or by category, taking into consideration each company’s capital structure, riskiness, complexity, financial activities, size, and any other risk-related factors that the Federal Reserve deems appropriate.” He said that once the FSOC designates one or more nonbank financial firms, the Fed is “committed to thoroughly assessing the business model, capital structure, and risk profile of each designated company and tailoring the application of the enhanced standards to each company on an individual basis or by category, as appropriate.”
In his opening statement, Thomas Quaadman, Vice President of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce, noted that with regard to the designation process, the Federal Reserve and the FSOC are not following the structure Congress passed into law. Quaadman recommended the FSOC increase transparency with regard to its proceedings on legislative matters and noted how the FSOC did not provide a cost-benefit analysis in the rulemaking process to allow stakeholders to determine the impacts of the proposed regulations.
In his opening statement, William Wheeler, President, Americas, for MetLife, discussed why regulated insurance activities generally do not pose systemic risk and why naming only a few insurance companies as SIFIs would “needlessly upset the competitive landscape in the insurance sector.” Wheeler also discussed why prudential regulation must be tailored to MetLife’s unique asset and liability characteristics in the event it is designated as a SIFI.
Question and Answer
Subcommittee Chairman Shelley Moore Capito (R-W.Va.) asked the regulators how they will assess differences in the industry business models with regard to the designation process.
Auer said the FSOC developed a three stage framework for the designation process. The first stage uses uniform quantitative thresholds to screen out “the large number of firms that the council is unlikely to consider for further evaluation.” The next two stages will take an “individualized look at each particular nonbank financial company under consideration to look at all of its activities, all of its businesses, the types of business it is in, the types of activities it engages in” so that the FSOC can take into account the specific factors of that firm in coming up with a final determination.
Gibson stated the Fed’s intent in its proposal for enhanced prudential standards to tailor the standards to the characteristics of the companies that are designated by the FSOC. “We understand that there are some nonbank companies for which the bank-like standards that we’ve proposed would likely be a bad fit. And we have committed to looking at that when those companies are designated and doing what we can to tailor the standards,” Gibson said.
Rep. Carolyn Maloney (D-N.Y.) asked for more clarity regarding the designation criteria and specifically asked how much interconnectedness makes a firm a SIFI.
Auer reiterated the FSOC’s designation process and said interconnectedness is one factor of many that the Council will take into consideration. He said interconnectedness will be assessed on a firm-by-firm basis.
Maloney asked Gibson whether the Federal Reserve’s prudential standards proposal for SIFIs will be modified to adapt to the distinct profile of non-bank SIFIs.
Gibson said the Fed is currently reviewing comments from its proposed rule released last December. He said he could not predict where the final rule will come out but did state that the Federal Reserve is “committed, after the companies are designated, to take a look at the need for tailoring the standards.”
Maloney also asked for clarity regarding the timing of the designations and when the Federal Reserve will develop prudential standards for nonbank financial firms.
Auer said the Treasury Secretary hopes the FSOC will begin the first of its designations “sometime this year.” Gibson said the Fed is still reviewing comments from its proposed rule.
Full Committee Chairman Spencer Bachus (R-Ala.) asked if there was any recognition that the proposed standards do not appear to fit asset managers, money markets, captive finance companies or insurance companies.
Gibson noted that with regard to certain non-bank financial firms, such as asset management and captive finance companies, the Federal Reserve would “certainly have to look at the need to tailor the standards that are in the proposed rule to the specific characteristics of those companies. And as you point out, an asset management company is very different from a bank because the assets it’s managing are not on its own balance sheet. They’re held in custody for customers, so that’s an important difference.”
“We have experience with asset management companies because there are large bank holding companies that are significant participants in asset management. But we don’t have the experience of writing capital and other prudential standards for a company that only engages in asset management. And that is what we would need to tailor. If and when those companies are designated, we would tailor the standards,” Gibson said.
Rep. James Renacci (R-Ohio) noted the confusion stemming from what it means for a nonbank financial company to be engaged in a financial activity under Title I of Dodd-Frank and asked whether the confusion will be resolved before the designation process is underway.
Gibson said the Federal Reserve issued a supplemental proposal last month to clarify certain aspects of that definition but said the FSOC does not believe they have to wait until the Federal Reserve’s final rule to designate companies. He said the Fed “defined as financial in nature activities that are referenced in certain sections of the law that defines what activities are permissible for a bank holding company. And by referring to that section of the law we’re incorporating the existing definitions of what is a financial activity into this definition of nonbank financial company.”
Scott asked if the FSOC has conducted a thorough cost benefit analysis on the designation of nonbanks as systemically important, specifically with regard to asset managers.
Auer said the “FSOC member agencies are obviously very concerned about the costs and benefits of their actions” but that the rule was designed to provide greater clarity about the Council’s designation process.
Scott asked if the FSOC has considered any adverse effects of the designation, specifically noting that asset managers do not invest with their own balance sheets, and asked where the process will end and whether other nonbank industries will be considered systemic as well.
Auer said the designation process will be undertaken on a firm-by-firm basis. Auer said asset management firms would unlikely be designated to the degree that such firms have their activities in custody and on behalf of customers and, as a result, do not pose a threat to financial stability.
Rep. Michael Grimm (R-N.Y.) asked if asset managers have been involved in the Office of Financial Research (OFR) study to date and if there is a formal process for conducting the due diligence for asset managers.
Auer said the OFR has “begun the process of talking with people in the asset management industry and will continue to do so.” He said any “asset management firm or any entity that wants to meet with the council staff or member agency staff about the designations process is welcome to contact any council member agency and we will try — or the OFR — will try and set up meetings for that firm.”
Grimm responded by noting that when a client changes an asset manager that does not mean that the portfolio is immediately liquidated and stated his hope that “the FSOC is looking at that and that there certainly would be adverse effects. I wish they would certainly consider that.”
Rep. John Carney (D-Del.) asked for more clarity regarding the designation process.
Auer said the FSOC’s final rule took effect this month and that the member agencies and the OFR are currently collecting data to assess which firms will pass the stage one threshold. He said stage two is designed around a six-factor framework that relate to the “probability that a firm might get into distress,” including leverage, liquidity, lack of substitutes, interconnectedness, size, and existing regulatory scrutiny. Auer said firms will be notified in stage three that they are under consideration by the FSOC. The firm will then have the to opportunity to provide information or arguments to the Council in support or opposition to the designation. If the FSOC decides to vote for a designation, the firm can then request a hearing in front of the Council. If the Council decides to approve the designation then the firm can appeal to the federal system.
Rep. Patrick McHenry (R-N.C.) asked if the Federal Reserve conducted cost-benefit analysis on its counterparty credit limit proposal.
Gibson said the Federal Reserve looks at the costs and benefits of every rule and that it is still gathering information on the particular counterparty credit limits that were proposed and the alternatives that were suggested by the commenters.
During the second panel, Renacci asked Wheeler how SIFI designations for certain insurance firms would affect the insurance sector.
Wheeler said such firms will be seen as “insurance firms you do not want to buy stock in.” He noted how these firms would be subject to higher capital requires, which would increase costs, and posited that the marketplace would punish those firms.
For testimony and a webcast of the hearing, please click here.