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Bipartisan bill aims to change non-bank SIFI designations

A bipartisan bill introduced in the Senate would require the Financial Stability Oversight Council to explore other avenues before designating non-banks systemically important financial institutions.

The Financial Stability Oversight Council Improvement Act was introduced on Feb. 28, not long before the council voted unanimously on proposed interpretive guidance that would make it less likely that a non-bank is given a SIFI designation. The proposal calls for emphasizing an activities-based approach — addressing potential risks and threats to U.S. financial stability on a systemwide basis rather than focusing on individual non-banks — and allows primary financial regulatory agencies to take the lead in addressing those risks.

The Senate Banking Committee held a hearing Thursday on FSOC's non-bank designation process. "The proposed guidance is a step in the right direction to improve FSOC's effectiveness, transparency and analyses," said Sen. Mike Crapo, R-Idaho, who chairs the committee.

The bill, which is sponsored by Sens. Mike Rounds, R-S.D., Thom Tillis, R-N.C., Doug Jones, D-Ala., and Kyrsten Sinema, D-Ariz., who each sit on the banking committee, would necessitate FSOC to first determine that a different action would not address risks posed to financial stability prior to a vote on an initial non-bank designation.

The council, in consultation with the company and the company's primary financial regulatory agency, would have to determine that it's "impracticable or insufficient to mitigate the threat that the company could pose to the financial stability of the United States," before a designation is made.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, non-banks that regulators concluded would threaten the financial system if they collapsed were given a SIFI designation. The SIFI label brings tough oversight by the Federal Reserve and a series of difficult supervisory exercises, such as stress tests and the submission of strategies for how the companies can be safely wound down in a bankruptcy.

Four non-banks — MetLife, General Electric Capital, American International Group and Prudential Financial — were given the SIFI label after Dodd-Frank went into effect, but none has one today. Most recently, the council rescinded Prudential's designation in October.

Sen. Sherrod Brown, D-Ohio, ranking member on the committee, does not like the direction FSOC is headed. "The Financial Stability Oversight Council has all but given up its role as the agency tasked with identifying and constraining excessive risk in the financial system," he said Thursday. "And Wall Street continues to push legislation that would further weaken FSOC, and make it impossible for future administrations to designate non-bank financial firms."

In testimony Thursday, Douglas Holtz-Eakin, president of the American Action Forum, an independent economic policy organization, voiced support for the proposed legislation. "The FSOC should have to state why they're dangerous and then turn to their primary regulator and say, 'Can you take care of this?' " he said. "And there has not been in the past, clear designation of why they're a danger and there's never been the chance for their primary regulator to mediate that in any way."