Dodd-Frank Council to Proceed with Picking ‘Systemic’ Nonbank Firms

September 28, 2012

The Financial Stability Oversight Council voted to move a group of non-banking financial companies forward in a process that will determine whether they are so big their failure would destabilize the economy, a Treasury Department spokesman said on Friday.

During a closed-door meeting, the FSOC decided to notify the companies under consideration for the “systemically important” tag, but will not name them publicly before the council makes its final decision, the spokesman said.

The tag translates into stricter oversight from the Federal Reserve and higher capital and liquidity standards, which some firms fear will put them at a disadvantage to their smaller rivals.

The 2010 Dodd-Frank financial oversight law created the oversight council, whose members include the heads of the Treasury Department, the Federal Reserve, the Securities and Exchange Commission, the Consumer Financial Protection Bureau and the Comptroller of the Currency.

The FSOC is expected to monitor banks and other financial firms whose failure could pose a serious risk to the financial system after the U.S. government was forced to bail out institutions during the 2007-2009 financial crisis.

One of the council’s tasks is to identify non-bank firms that it considers systemically important – a controversial process that some critics say enshrines certain firms as “too big to fail,” while others say it harms those firms by putting them more firmly under the government’s thumb.

Hedge funds and major insurance companies have feared that they could be designated as systemically important because of their size and how interconnected they are with other financial firms. They would then face the type of scrutiny Dodd-Frank assigned to Bank of America, JPMorgan Chase, Goldman Sachs and others.

Meanwhile, Treasury Secretary Timothy Geithner, has called for the FSOC to suggest rules for money funds. The oversight council on Friday asked its staff to craft a recommendation for the group to consider at its November meeting.

The council also discussed other topics related to global and domestic markets, including the ongoing crisis in Europe, the Treasury spokesman said.

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