Federal regulators will try to be more open about how they decide which non-bank companies could pose risks to the financial system and need additional regulation.
The Financial Stability Oversight Council, a super-group of major federal financial regulators, announced after a meeting Wednesday that it would overhaul its process for designating non-banks "systemically important financial institutions," a label that carries with it added regulation and oversight from the Federal Reserve.
The move is a response to criticism from Congress and the financial industry as well as a lawsuit from the business most recently labeled a "SIFI."
"The changes adopted today represent an important step for the council that will increase the transparency of our designations process and strengthen the council overall,” said Treasury Secretary Jacob Lew in a statement announcing the changes. Lew, the council's chairman, said the group "has the unique and critical mission of identifying and responding to risks to U.S. financial stability. It is a young organization that, as it grows and matures, must continue to be flexible and adjust its processes as needed to fulfill its mandate.”
The council said, effective immediately, it will contact companies under consideration for the label earlier in the process, giving them a chance to discuss it with the regulators and make the case that they would not pose risk to the broader financial system if they failed.
Previously, the council has not released the names of companies under consideration. Under the new rules, the council will state the name of the company and the logic behind designating it systemically important if the firm company already publicly acknowledged that it is going through the process.
The council will also allow for more engagement with companies during the annual review of their status as systemically important.
Companies have criticized the council for keeping them in the dark until late in the game, exposing them to a greater regulatory burden without the chance to plead their case.
Most recently, life insurance company MetLife challenged its designation in court after losing an appeal to the council.
The council has named four companies SIFIs: Metlife, Prudential Financial, General Electric Capital Corp. and American International Group.
It was AIG's 2008 collapse, which threatened to bring down the Wall Street banks that were its counterparties in swaps contracts, that provided the basis for the council. The 2010 Dodd-Frank financial reform law created it to identify financial threats originating outside the traditional banking system.
In addition to insurance companies, the council is investigating whether it should designate asset management firms such as Fidelity and BlackRock.
Congressional Republicans, and some Democrats, have sought to slow or stop the council's designations, construing them as regulatory overreach by an unaccountable government body. Republicans also have criticized the SIFI label as an official recognition that a company is "too big to fail."
In addition to the Treasury secretary, the council includes the heads of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, the National Credit Union Administration, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Housing Finance Agency, and an independent member with insurance expertise.