THE FINANCIAL Stability Oversight Council (FSOC)—which came under intense pressure from insurers and
their supporters in Congress to be more
specific in disclosing the qualitative and
quantitative standards that will be used in
determining whether an institution is sys-
temically significant—released on Oct. 11 a
much more detailed proposal for designat-
ing non-bank companies as “SiFi.”
The proposal, approved for public com-
ment by the FSOC, was described as “pro-
posed interpretive guidance” by Lance Auer,
a staff official at the Federal Deposit Insur-
ance Corp. who helped draft the proposal.
Under Dodd-Frank, if an insurer were to
be designated as SiFi, it would be regulated
by the Federal Reserve Board, which will
establish the “prudential standards” the
non-bank SiFis must adhere to.
The SiFi would have to register with the
Fed within six months and would be subject to additional capital standards as well
as other requirements.
The process, if approved after an extensive
public-comment period, will be as follows:
J The FSOC will make each decision on
a firm-specific basis, with the analysis encompassing both quantitative analysis and
qualitative judgment.
J It will assess the potential impact of a
company’s financial distress on the broader
economy based on size, substitutability
and interconnectedness.
J It will assess the vulnerability of a company to financial distress based on leverage, liquidity risk and maturity mismatch,
and existing regulatory scrutiny.
A three-stage process will be used in
evaluating companies:
1 Application of a uniform quantitative
threshold for identifying a non-bank financial
company (NFC) that warrants further review.
2 An analysis of the NFCs identified in
stage 1, based on available public and regulatory information.
3 Contacting individual NFCs that warrant further review to collect data not available in the earlier stages.
At the end of the third stage, the FSOC
will hold a vote. At least two-thirds of voting
members, including the chairperson, must
vote in the affirmative for an NFC to be designated. The designated companies may request
a hearing, after which the FSOC must again
vote by a two-thirds majority for designation.
What are the uniform quantitative
thresholds the FSOC intends to apply in
stage 1 to identify companies that may
warrant SiFi designation?
An NFC will be subject to further evaluation if it has at least $50 billion in total
consolidated assets and meets or exceeds
any one of the following:
J $30 billion in gross notional credit-default
swaps outstanding
J $3.5 billion in derivative liabilities
J $20 billion of outstanding loans borrowed
and bonds issued
J 15-to-1 leverage as measured by total consolidated assets to total equity
J 10-percent ratio of short-term debt to total
consolidated assets
The FSOC said it believes these thresh-
olds will provide “meaningful initial assess-
ments” regarding the likelihood that a NFC
could pose a threat to U.S. financial stabil-
ity; and that the thresholds “add significant
transparency to the designation process.”
In a note issued Oct. 11, Fitch Ratings
said the clarification of the SiFi criteria would
potentially be “significant” in differentiating
the credit profiles of certain large insurers,
particularly with respect to capital require-
ments and higher operating costs linked to
tougher regulatory-compliance requirements.
“While stronger capital ratios would in
and of themselves represent a credit posi-
tive, they could also impose higher costs
associated with carrying statutory capital,”
Fitch Ratings said.
