Financial firms that the U.S. government deems as “systemic” will not be “too big to fail,” bank regulator Sheila Bair said Thursday.
Bair, pushing back against critics who say the systemic designation is simply a government guarantee, said a major criteria for the designation is whether the government can liquidate them if they start to fail.
Under the new Dodd-Frank financial oversight law the government can designate non-bank financial firms as being systemically important financial institutions, or SIFIs, because their failure could roil markets and damage the economy.
These firms, along with banks with more than $50 billion in assets, will be subject to more regulatory scrutiny by the Federal Reserve and will fall under the Federal Deposit Insurance Corp.’s new liquidation authority.
FDIC Chairman Bair said there is a misconception that policymakers do not have the means or the will to close down the SIFIs in a crisis.
“Ultimately, the ‘resolvability’ of an institution should determine if it is designated as a SIFI,” she said at a banking conference sponsored by the Federal Reserve Bank of Chicago.
“Ninety percent is just getting the market to believe” that policymakers will shut down firms instead of bailing them out, she said.
Bair acknowledged that a sweet spot for financial firms will be falling just short of SIFI status so as to avoid burdensome regulations.
She said it was critical for the Financial Stability Oversight Council, or FSOC, to move quickly on developing hard criteria for the SIFI designation process.
Insurers, hedge funds, mutual funds, and other non-bank financial firms have been clamoring for clarity on whether they will fall into the regime.
The Federal Reserve released in February a general proposal on how the United States would pick out these “systemic” firms, including a two-year test to determine if a firm’s predominant business is financial.
Members of Congress have complained that FSOC has not been clear about the criteria it will use when designating companies as systemically important.
On Wednesday the top Republican and Democrat on the House Financial Services oversight subcommittee wrote FSOC members asking them to postpone issuing a final regulation on designating such firms until more details are provided about how companies will be given the systemically important tag.
Bair, who is a member of FSOC, said the council should cast a wide net when collecting information from financial firms to determine if they are systemic and able to be dismantled.
Requiring information from firms well under the cutoff will avoid “deathbed designations,” she said, where the government has to slap a “systemically important” label on a failing firm so as to keep its collapse from threatening the broader financial system.
“We need to have a relatively lower threshold to at least be able to ensure that they are resolvable in a bankruptcy process,” she said. “We are very concerned about being gamed.”
She said policymakers still have a ways to go to convince markets they will not rescue big financial firms.
Bair cited a Moody’s report in February that unsecured debt at eight large U.S. banks got an average “uplift” of 2.2 ratings notches compared to smaller banks on the back of that expectation. Large banks continue to be able to borrow at much lower rates than small firms, she said.
“This situation can only be regarded as a new and dangerous form of state capitalism, where the market assumes large, complex, and powerful financial companies are in line to receive generous government subsidies in times of financial distress,” she said.
“Unless reversed, we can expect to see more concentration of market power in the hands of the largest institutions, more complexity in financial structures and relationships, more risk-taking at the expense of the public, and, in due time, another financial crisis.
(Reporting by Ann Saphir and David Clarke; Editing by Karey Wutkowski and Tim Dobbyn)