U.S. regulators are set to choose the first non-bank companies likely to be branded potential risks to the financial system, according to two people with knowledge of the plans.
The Financial Stability Oversight Council intends to request confidential data from as many as five U.S. firms at a meeting this month, said the people, who declined to be identified because the plans aren’t public. The request is a step toward deciding whether the companies should be subject to Federal Reserve supervision, including stress tests, higher capital levels and tougher liquidity requirements.
Regulators want to ensure that no firm posing a potential risk to the financial system escapes scrutiny, while non-bank financial firms argue that designation would burden them with unnecessary costs and economic stability wouldn’t be threatened if they failed. Bailed-out insurer American International Group Inc. has said it meets thresholds the council set to decide which firms require further evaluation. GE Capital, a unit of General Electric Co., has said it expects to be named systemically important.
If the council “identifies companies this month, it means that the first FSOC train is leaving the station and final designations could be made by the end of the year,” said Thomas Vartanian, a partner at law firm Dechert LLP in Washington whose clients may be affected by FSOC. “This new systemic oversight could have a significant impact on them if they cannot rebut designation.”
The council is tentatively scheduled to meet Sept. 28, the people said. The companies would then have 30 days to submit the data, which could include non-public information such as details on a firm’s financial relationships, or interconnectedness, with other companies.
Treasury Secretary Timothy F. Geithner is chairman of the council, which includes Fed Chairman Ben S. Bernanke and the heads of the Securities and Exchange Commission, Federal Deposit Insurance Corp. and Commodity Futures Trading Commission.
AIG, recipient of a bailout that reached $182.3 billion, was a catalyst for the FSOC’s creation under the Dodd-Frank financial-overhaul law. AIG’s trades of over-the-counter derivatives leading up to the financial crisis were largely unregulated, and lawmakers wanted a panel of regulators to share information and meet regularly to help avoid a repeat.
Geithner told the House Financial Services Committee in July that the council was “looking very, very carefully” at New York-based AIG and other companies he didn’t name. Geithner has said the council will make the first designations this year.
The U.S. cut its stake in AIG to about 16 percent from 53 percent in a share sale this week. AIG said in a filing dated Sept. 9 that it will be regulated by the Federal Reserve after the U.S. stake falls below 50 percent. A designation as systemically important “could further limit our ability to pay dividends or repurchase shares of our common stock,” AIG said in the filing.
Treasury spokesman Anthony Coley and Jim Ankner, an AIG spokesman, both declined to comment.
The council considers companies with more than $50 billion in assets as systemically important if they also meet one of the following thresholds: a 15-to-1 leverage ratio; $3.5 billion in derivatives liabilities; $20 billion of outstanding loans borrowed and bonds issued; $30 billion in gross notional credit-default swaps outstanding; or a 10 percent ratio of short-term debt to assets.
Each step the council takes, such as seeking non-public information about firms under consideration, “is like hardening cement” making it more difficult for them to “convince FSOC not to designate,” said Satish Kini, co-chairman of law firm Debevoise & Plimpton LLP’s banking group in Washington. “Companies would like to get out of consideration sooner rather than later.”
A company under consideration as a systemically important financial institution, or SIFI, can challenge the notice within 30 days. The council then has 30 days to schedule a non-public hearing and 60 days after the hearing to make a final ruling. Two-thirds of the council’s voting members, including the Treasury secretary, must approve any designation.
“This is an opportunity for a company to supply information to enter into a dialogue with FSOC and its staff,” Kini said. If the process works as FSOC designed, companies will get a chance to make the case that they shouldn’t be designated, he said.
Bank-holding companies with more than $50 billion in assets -- including Bank of America Corp., JPMorgan Chase & Co., Morgan Stanley, Goldman Sachs Group Inc., Wells Fargo & Co. and Citigroup Inc. -- are automatically subject to heightened Fed supervision under Dodd-Frank. Non-banks designated systemically important would get Fed oversight similar to that of the large banks.
Prudential Financial Inc., the second-largest U.S. life insurer, has said it meets the council’s thresholds for further evaluation. Spokesman Bob DeFillippo said Prudential has been working with regulators and wants to make sure “they understand that we shouldn’t be pounded into a bank mold, that they look at us for the company that we are.”
GE Capital “has a strong capital position, solid earnings and a diversified funding base,” Spokesman Russell Wilkerson said. “We are prepared for whatever outcome the regulators may reach.”
Mike Neal, GE Capital’s chief executive officer, said at an investor conference in May that the firm is likely to be designated.
“We have not been designated a SIFI as yet, but it’s likely,” he said.
MetLife Inc., the largest U.S. life insurer, has been regulated by the Fed because it owns a bank. The firm is seeking to exit banking to limit oversight, which has prevented New York-based MetLife from boosting its dividend or repurchasing shares.
“We do not believe regulated insurance activities pose systemic risk to the U.S. financial system,” MetLife CEO Steven Kandarian said on an Aug. 2 conference call with analysts. “In the event that certain insurance companies are named SIFIs, the impact is a matter of public debate.”