Brookings: Regulating NonBank SIFIs

 

Regulating Systemically Important Financial Institutions That Are Not Banks

By Douglas Elliott, May 9 2013.

Certain financial institutions are so central to the American financial system that their failure could cause traumatic damage, both to financial markets and the larger economy. These institutions are often referred to as “systemically important financial institutions” or SIFIs. The Dodd-Frank Act, the comprehensive reform legislation signed into law during the summer of 2010, requires financial regulators belonging to the Financial Stability Oversight Council  (FSOC) [1] to name those financial institutions that it believes are systemically important. [2] Such SIFIs are to be supervised more closely and potentially required to operate with greater safety margins, such as higher levels of capital, and to face further limitations on their activities.

Highlights

  • Under Dodd-Frank, financial regulators belonging to the Financial Stability Oversight Council (FSOC) are required to name entities that are deemed to need closer regulatory supervision and potentially required to operate with greater safety margins, such as higher levels of capital, and to face further limitations on their activities.
  • As the FSOC looks to designating life insurers and other non-banks as SIFIs, there is little known about how the regulatory change would affect them in practice, creating major uncertainty that would affect their business without adequate consideration of their real roles and structures.
  • Because these insurers are financial institutions with millions of customers, Elliott says it is important to think about whether they will be placed at a considerable disadvantage by rules that are ill-designed for their business, which could in turn hurt not just their customers but the overall economy given the industry’s size: there are nearly 900 life insurers that are responsible for $19.2 trillion worth of policies and certificates, and the industry is one of the largest sources of U.S. investment capital with $4.9 trillion invested in the domestic economy.
  • Once a non-bank financial institution has been designated as a SIFI, very real questions arise as to how best to regulate these institutions. The Fed has promised to pay careful attention to the differences between banks and other financial institutions that are designated as SIFIs. Elliott emphasizes it is crucial that they be rigorous in doing so.

For complete article, see Douglas Elliott, Brookings, May 9 2013.

(Emphasis added)