GOP senator tells Geithner to go slow on 'systemically important' firms

By Peter Schroeder - 09/28/12 01:07 PM ET

A Republican senator is urging Treasury Secretary Timothy Geithner to tread lightly when it comes to tagging financial institutions as meriting heightened oversight due to their vital role in the financial system.

Sen. David Vitter (R-La.) sent a letter to Geithner Friday in which he cautioned that regulators could do great harm to companies that are deemed to be "systemically significant," especially considering all the rules governing that new designation have yet to be written.

"Secretary Geithner and the Financial Stability Oversight Council (FSOC) created by Dodd-Frank need to slow down their regulatory regime's efforts to designate non-banks as systemically important until all of the rules for the designation process are clarified and finalized, and ensure that taxpayers aren't going to be on the hook to bailout these companies down the road," he said in a statement.

The FSOC was created by the Dodd-Frank reform law as a place to gather top financial regulators together and charge them with overseeing the overall stability of the financial system. One of the key new powers handed to that panel is the ability to identify what financial institutions qualify as vital to the financial system, and therefore merit heightened regulations and oversight.

The FSOC has been working on identifying these firms, and has established criteria that would tag some of the nation's largest banks, as well as some of the most integral intermediaries of the financial system, as systemically significant.

However, the FSOC also has the power to identify nonbank financial institutions as significant, and Vitter said in his letter the group should hold off on doing so until it finalizes what rules would exempt such institutions from the label.

"Designating firms without having finalized all of the rules, given the material nature of even a preliminary designation, and the attendant disclosure requirements of federal securities law, would be ill-advised and would create a level of unfairness to designate firms from which it would be impossible to recover," he wrote.

He also chided the FSOC for holding brief public meetings largely filled with formalities before doing most of its work behind closed doors.

Instead, the Senate Banking Committee member contended the FSOC should avoid identifying nonbanks as significant until all the relevant rules are completed — if they are to identify any firms at all.