Oversight Council to Take More Time Identifying Systemic Risk Firms

By | May 12, 2011

The U.S. risk council will give the public more time to comment on the criteria for picking so-called “systemic” financial firms, after lawmakers scolded the new council for being opaque on the process.

U.S. bank regulator John Walsh said the council of major supervisors that includes the chairman of the Federal Reserve agreed they need more comment on the process, according to remarks prepared for a congressional hearing on Thursday.

The Financial Stability Oversight Council has already sought comment on its proposed criteria to designate non-bank “systemically important financial institutions,” called SIFIs, whose failure could pose a risk to the broader financial system. The criteria include size and how connected the firm is to the financial system.

The designation, which firms such as insurers and hedge funds are trying to avoid, comes with special oversight by the Fed, and higher capital and liquidity requirements.

Republicans, and some Democratic lawmakers, have told regulators they need to be more specific to get appropriate public comment.

Securities and Exchange Commission Chairman Mary Schapiro said the council plans to provide additional guidance on its approach to designations.

Walsh, acting head of the Office of the Comptroller of the Currency, said, “It is critical that FSOC strikes the appropriate balance in providing sufficient clarity in our rules and transparency in our designation process, while at the same time avoiding overly simplistic approaches.”

The regulators will testify Thursday at a Senate Banking Committee hearing on how they are managing potential risks to the financial system. Under last year’s Dodd-Frank bill, the risk council was created to avoid a repeat of the recent credit crisis when regulators and Wall Street were caught off guard by fallout from the housing bust.

Fed Chairman Ben Bernanke said larger financial firms should face more onerous regulatory requirements to make sure they can withstand turbulence in economy or credit markets, according to the testimony obtained by Reuters on Wednesday.

Under Dodd-Frank, bank holding companies with assets of $50 billion or more automatically fall under “systemic.” supervision. That means firms such as Goldman Sachs Group Inc. and JPMorgan Chase & C.o would likely be among the SIFIs.

Big financial firms that fall outside the banking world have been making their pitch to the Fed on why they should not be considered for supervision.

BlackRock Inc, the world’s biggest money manager, has visited the Fed and told staff that asset management companies are not that interconnected to the rest of the financial markets.

(Reporting by Dave Clarke, writing by Karey Wutkowski and Rachelle Younglai; Editing by Carol Bishopric and Tim Dobbyn)

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