SEC comment on the OFR report, 'Asset management and financial stability'

Article Highlights

  • Regulators must be extremely cautious when they designate institutions as systemically important

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  • SIFI designation may increase systemic risk as customers may be less diligent managing their SIFI exposures

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  • There is no possibility that mutual fund losses will trigger a systemic banking crisis

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The Dodd-Frank Act created regulatory uncertainty when it gave the Financial Stability Oversight Council the power to designate financial firms as systemically important financial institutions or SIFIs. If the Council finds that financial firms create “systemic risks” that threaten financial stability, it can designate the firm a SIFI and require it satisfy capital, leverage, liquidity, and enhanced supervision processes that are similar to those Dodd-Frank prescribes for the largest banking institutions.

Non-bank SIFI designation is a contentious issue because there is no clear definition of what constitutes “systemic risk” and no framework for assessing a non-bank financial firm’s impact on financial stability. Moreover, there is no economic analysis that demonstrates that FSOC-designated non-bank financial SIFIs will pose reduced financial stability risks if they are required to follow the enhanced capital, leverage, and supervisory standards similar to those required by bank SIFIs under Dodd-Frank.

To date, the Council has designated AIG, GE Capital, and Prudential Financial as non-bank SIFIs. Dodd-Frank allows the Federal Reserve to modify the enhanced prudential standards for bank SIFIs to better accommodate specialized industry characteristics of any non-bank financial SIFIs the Council designates, and yet the Federal Reserve has not yet specified any specific alterations to the enhanced prudential standards it will apply to bank SIFIs. Until it does, non-bank SIFI designees must prepare to comply with Basel III regulatory capital rules and liquidity standards, orderly liquidation planning, and Federal Reserve designated stress testing even though these rules were specifically designed for banks, not for insurance, finance or asset management companies.

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Paul H.
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