‘Too Big To Fail’ On The Agenda Again
January 22, 2015 by Mary Williams Walsh
Top financial regulators on Wednesday discussed ways to improve how so-called too-big-to-fail institutions are singled out for closer supervision, but they stopped well short of reversing any designations made so far.
The proposals discussed by the Financial Stability Oversight Council included making earlier and fuller disclosures of information and giving companies designated as ”systemically important” more opportunities to have their names removed from the list.
”It’s important for us to be nimble and adjust our processes as we continue to grow and mature,” said the Treasury secretary, Jacob J. Lew, who leads the council.
It was not clear whether such changes would mollify members of Congress who have criticized the council recently, warning that its actions could harm American competitiveness.
Any changes would also come too late to help MetLife, the big life insurer that was designated systemically important in December, subjecting it to tougher capital and disclosure requirements and supervision by the Federal Reserve. MetLife filed suit in federal court earlier this month, seeking to have the designation rescinded as ”arbitrary and capricious.”
Without mentioning MetLife or its lawsuit, Mr. Lew indicated that the panel would not back down.
”Our existing process is rigorous,” he said, noting that he thought some of the council’s critics wanted simply to roll back the 2010 Dodd-Frank financial overhaul law, which created the council, and to strip the panel of its powers to curb excessive risks to the financial system.
”That would be a grave mistake, and I’m committed to making sure it does not happen on my watch,” Mr. Lew told the council, which includes top officials from other regulators like the Fed.
Since October, the council’s staff has been meeting with companies, congressional staff members, consumer advocates and officials from the Government Accountability Office to hear their specific complaints. Staff members reported that the companies under review wanted to be notified earlier in the process and to understand how the council’s metrics worked.
The companies in line for a too-big-to-fail designation also wanted to know specifically which of their business activities attracted the council’s attention. Staff members said they thought the public should be able to find out how many nonbanks were under review at any given time and that such information should be included in the council’s annual report. They said the council should grant each designated company an oral hearing at the end of five years and vote on whether the designation was still valid. For one-year reviews, they said, the burden of proof should be on the designated companies to show that they were incorrectly classified.
The council was established after it became clear during the 2008 financial crisis that while there were separate regulators for the banking, insurance, brokerage and other businesses, no one regulator could put the pieces together and monitor the safety of the overall financial system. That allowed a significant risk of contagion to build up in the system so that when a few important institutions began to teeter and fail, they threatened to take down countless other institutions with them in a cascade that could not be stopped without a huge taxpayer bailout.
The council has the authority to identify financial institutions that pose systemic risk and to designate them ”systemically important financial institutions,” or SIFIs. Banks fall into that category based simply on their size, and they are subjected to the new capital, liquidity and other standards being phased in under the international banking agreement known as Basel III.
But the rules are much less clear-cut for insurers and other nonbank institutions. The council has been using a broad review process for insurers, taking into account their size, their degree of connectedness with other institutions and other factors. In December, Congress enacted a clarification that systemically important insurers would not have to comply with the banking rules, but the Fed has yet to issue its rules for SIFI (pronounced SIH-fee) insurers.
In addition to reviewing insurers and nonbank lenders, the regulators have been looking at whether any asset managers pose systemic risk.
MetLife has argued that the process the council uses for asset managers is more rational than the one used for insurers. In its suit, it said the council’s decision would cause it ”irreparable harm” by holding it to higher standards than its competitors. MetLife also complained that the council kept information secret, making it impossible for it to learn exactly what its designation was based on.
Other panelists at Wednesday’s meeting, including Janet L. Yellen, the Fed chairwoman, and Mary Jo White, chairwoman of the Securities and Exchange Commission, spoke in favor of the staff recommendations. The group agreed to wait till the next meeting to ratify any changes.
This is a more complete version of the story than the one that appeared in print.
