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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About the Author

 

Paul H.
Kupiec
  • Paul H. Kupiec is a resident scholar at the American Enterprise Institute (AEI), where he studies systemic risk and the management and regulations of banks and financial markets. He also follows the work of financial regulators such as the Federal Reserve and examines the impact of financial regulations on the US economy.

    Before joining AEI, Kupiec was an associate director of the Division of Insurance and Research within the Center for Financial Research at the Federal Deposit Insurance Corporation (FDIC), where he oversaw research on bank risk measurement and the development of regulatory policies such as Basel III. Kupiec was also director of the Center for Financial Research at the FDIC and chairman of the Research Task Force of the Basel Committee on Banking Supervision. He has previously worked at the International Monetary Fund (IMF), Freddie Mac, J.P. Morgan, and for the Division of Research and Statistics at the Board of Governors of the Federal Reserve System.

    Kupiec has edited many professional journals, including the Journal of Financial Services Research, Journal of Risk, and Journal of Investment Management.

    He has a bachelor of science degree in economics from George Washington University and a doctorate in economics — with a specialization in finance, theory, and econometrics — from the University of Pennsylvania.

  • Phone: 202.862.7167
    Email: paul.kupiec@aei.org
  • Assistant Info

    Name: Brian C. Marein
    Phone: 202.862.5890
    Email: brian.marein@aei.org

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