U.S. Lays Out Factors to Designate Risky Firms

January 19, 2011

U.S. regulators proposed using six different factors Tuesday to help them gauge when a non-bank financial firm poses risks to the system and merits additional oversight.

The Financial Stability Oversight Council agreed in a unanimous vote to open a 30-day comment period on the rules. Final adoption is expected in the spring.

The proposal lays out six factors that regulators would use to determine if non-bank financial firms like hedge funds, insurance companies, broker-dealers and specialty finance companies threaten to destabilize the U.S. financial system.

The factors that regulators would potentially consider include: size, the dominance of a firm in its industry, interconnectedness, use of leverage, liquidity risk, and the existing degree of oversight on the firm.

The proposal said that while the six categories would apply broadly for all sectors, regulators would still have flexibility to tailor the criteria to companies in different sectors.

Regulators expect to start choosing after the spring which financial firms are “systemically” important, a Treasury official said.

Non bank financial institutions that are labeled as important will be subject to additional supervision by the Federal Reserve.

The Treasury official said there is no estimate on the number of potential institutions that could be chosen and said types of firms include: broker-dealers, asset managers and specialty finance companies.

The comments were made after the Financial Stability Oversight Council proposed six categories it will use to select which institutions may threaten the financial system.

(Reporting by Sarah N. Lynch and Rachelle Younglai; editing by Carol Bishopric)

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