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New SIFI Process Proposed, Will Focus on Systemic Risks

The proposed guidance would put in place a new approach first suggested in 2017.
  • Frank Klimko
  • April 2019
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The Financial Stability Oversight Council wants to adopt industry-friendly language in a new interpretive guidance over how it designates insurers as systemically important financial institutions, focusing on system-wide risks rather than individual institutions.

The council voted unanimously to issue new rules under which it would have to take an activities-based approach toward designation, perform a pre-designation cost-benefit analysis and assess the likelihood of a nonbank financial company's material financial distress before assigning it a SIFI label.

It’s clear federal regulators under the Trump administration don’t anticipate designating any insurers as SIFIs.

Ian Katz
Capital Alpha Partners

The new approach would largely side with the insurance industry over a central element in the fight over interpreting the powers given to the FSOC through the Dodd-Frank Act. Critics, and the FSOC itself, have argued the FSOC was required to test a company's material financial strength first before deciding whether to designate it as a SIFI.

Under the prior administration, attorneys for the FSOC said the Dodd-Frank financial reforms never required the FSOC would first test each company's financial sturdiness. However, Judge Rosemary M. Collyer, of the U.S. District Court for the District of Columbia, ruled the FSOC violated its own guidance by failing to measure MetLife Inc.'s vulnerability to material financial distress. MetLife eventually prevailed and shed its SIFI designation via litigation in 2016.

The guidance asks whether the council should incorporate Collyer's decision into the way it designates SIFIs.

The new rule mandating a cost-benefit analysis is also a big change. Under the proposed rule, the council would designate a nonbank financial company only if the expected benefits outweighed the anticipated costs of the designation.

It's clear federal regulators under the Trump administration don't anticipate designating any insurers as SIFIs, Ian Katz, director of Capital Alpha Partners, said in a research note.

“The FSOC decision cements the view, which was already gaining momentum under (President Barack) Obama, that the days of designation are over—unless some 2008 AIG-like craziness appears poised to emerge,” he said.

FSOC critics, however, called the new proposed guidance a step in the wrong direction.

“These actions irresponsibly ignore the lessons of the 2008 crash, which was ignited in and spread by systemically significant nonbanks in the shadow banking system,” said Dennis Kelleher, president and chief executive officer of Better Markets.


Frank Klimko is Washington correspondent, BestWeek. He can be reached at frank.klimko@ambest.com.


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