Financial regulators sign off on plan to label companies as vital to financial system

The FSOC was created as part of the Dodd-Frank financial reform law. While the regulators on the panel are each charged with monitoring pieces of the financial system within their own agencies, the new board was created to make sure they also keep an eye on the health of the system as a whole. And a key piece of the FSOC's mandate is determining what financial institutions qualify as "systemically significant" and merit heightened regulations and oversight from the Federal Reserve.

That job, which could bring some institutions under new regulatory oversight for the first time, has become a focal point for a slew of interested parties.

"It's a big deal," said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable. "It will permanently divide the industry into two groups — SIFIs and non-SIFIs," he said, referring to systemically important financial institutions.

For the FSOC, the job of identifying banks is straightforward — Dodd-Frank stipulates that all banks with more than $50 billion in total assets automatically are deemed significant and get a closer look.

The tug-of-war is over how to handle nonbank financial institutions, such as insurance companies or brokerage firms. For a year and a half, regulators have been trying to chart a course for identifying systemically important financial institutions.

In its October proposal — which was actually a re-proposal after a January proposed received significant feedback — the FSOC suggested whittling down financial firms worthy of designation to those with more than $50 billion that also are either extensively leveraged, are invested in a substantial amount of derivatives or credit-default swaps, or has an outsized amount of short-term debt on its books that could make it susceptible to shocks.

After that initial scan, regulators would review each candidate on a case-by-case basis, before finally decided whether to hand down the title of "SIFI." The final version regulators signed off on Tuesday tracks closely with that October attempt.

Wall Street reform advocates called foul over the $50 billion threshold, arguing setting such a limit would allow some smaller institutions integral to the health of the system to go overlooked.

"Everyone says they are for ending too-big-to-fail institutions, but that will only happen if they are regulated as required by the Dodd Frank financial reform law," said Dennis Kelleher, president of Better Markets. "FSOC failed to do that today." 

However, the final rule includes under its list of criteria "any other risk-related factors that the Council deems appropriate," and the FSOC noted that it reserves the right to further analyze any company it thinks merits a closer look "irrespective of whether such company meets the thresholds."

Beyond designating firms, another major question is exactly how SIFIs would be regulated. In the final rule, regulators noted that a number of comments called on regulators to hold off on finalizing the designation rules until figuring out how the enhanced regulation would work. However, the FSOC noted that that process is under way, but that it is not "necessary or appropriate" to hold off on the designation portion.

— This story was updated at 4:38 p.m.