Nonbank SIFI designation process to be more open

By Richard A. Roth, J.D.

Last week the Financial Stability Oversight Council adopted supplemental procedures that are intended to improve its ability to decide whether a nonbank financial company should be designated a systemically important financial company that is subject to Federal Reserve Board supervision and enhanced prudential standards. According to the FSOC, the new procedures do not change the established three-stage SIFI analysis; however, they will give companies an earlier notice that they are being considered for designation and offer companies being considered a better opportunity to participate in the process. This, in turn, might help some companies avoid the SIFI designation by changing or eliminating business activities or practices that pose the greatest risk to U.S. financial stability.

The FSOC already has designated several nonbank companies as SIFIs. The most recently designated, MetLife, has filed suit in an effort to overturn the designation.The Council’s current plan to consider asset management companies for SIFI designation also has raised objections, and the Council, along with adopting its new procedures, is extending the public comment on that plan to March 25, 2015.

Designation process. Currently, the nonbank SIFI designation process has three stages:

1. Stage 1, when six quantitative thresholds are applied to a large group of candidate companies to identify any that merit further consideration.
2. Stage 2, when a preliminary analysis of the companies identified in Stage 1 is carried out, based on available information, to decide if any could pose a threat to financial stability.
3. Stage 3, when an additional quantitative and qualitative analysis is performed for those companies that passed the Stage 2 screen. This might result in a proposal to designate a company as a SIFI. If a designation is proposed, the company is notified and given an opportunity to respond.

Changes. Under the new procedures, a company will be told if the Council decides that a Stage 2 analysis is needed, as opposed to being told only when a Stage 2 analysis calls for Stage 3 consideration. Also, the company will be allowed to offer information and consult with FSOC staff during the Stage 2 analysis.

Periodic reviews. The Council is going to make the subsequent review process more open as well. Each nonbank SIFI designation is to be reviewed at least once each year. A SIFI will be able to meet with the Council’s staff to discuss this review and provide relevant information. This will give the company an opportunity to describe changes it has made that reduce the threat it presents, with a view toward demonstrating that the designation no longer is necessary.

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