Dodd-Frank panel faces pushback on rules for naming vital Wall Street firms

Federal regulators are facing opposition from business groups as they try to develop a system to ensure that large institutions do not cause another financial crisis.

At issue is how regulators will determine what financial firms deserve the title "systemically significant." Lawmakers developed the designation after the financial crisis, when a chain reaction among financial firms nearly sparked a global panic.


The Dodd-Frank financial reform law requires regulators to determine what institutions are crucial to the economy and see that they remain healthy and solvent.

If an entity is deemed a “systemically important financial institution,” or SIFI, it will be subject to heightened regulation and oversight. Depending on the institution’s balance sheet, regulators might require the SIFI institutions to bolster their capital reserves to guard against financial shocks.

But the prospect of heightened regulations has industry groups pushing hard to ensure that the government treads lightly with the enhanced oversight powers.

"Any kind of designation is going to have a profound impact, so we want to make sure they do it in the best possible way with the least burden to capital markets," said Alice Joe, executive director for the Chamber of Commerce's Center for Capital Markets Competitiveness. "There's a huge, huge cost in becoming a designated SIFI."

Wall Street reform advocates, meanwhile, are arguing that proposals put forward by regulators overlook key pieces of the market and would do little to prevent another crisis.

"This is the section of the Dodd-Frank Act that gives federal regulators the authority to handle the problems in the shadow banking system, and they’re really not living up to that," said Marc Jarsulic, chief economist for Better Markets, a nonprofit group pushing for tougher regulation.

That tug-of-war is centered on the team charged with making the SIFI designation, which is also a Dodd-Frank creation — the Financial Stability Oversight Council (FSOC). 

The panel is charged with overseeing the health of the financial system as a whole, and is made up of the nation's top financial regulators, including Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke.

A key item on the FSOC's agenda is figuring out the criteria for systemic significance. For banks, it is straightforward, as the law states that banks with more than $50 billion in assets automatically qualify as significant.

The law gets murkier when it comes to nonbank financial institutions. For those firms, the FSOC is trying to draft a blueprint for what sort of firms could qualify as SIFIs, and how it would go about making the designation.

The FSOC proposed rules in October, laying out its framework for designations. In its proposal, nonbanks must have at least $50 billion in assets to be considered, as well as have billions in exposure to credit default swaps, other derivatives or debt. Large nonbanks could also qualify if they are highly leveraged or loaded up on short-term debt that could make them susceptible to shocks.

Better Markets wrote a scathing letter in response to the proposal, arguing the “incomplete and limited” criteria overlooked many types of firms that contributed to the financial crisis. 

Without making major changes to the rule, including reducing the size of institutions that can be named SIFIs, key firms “will continue to be largely unregulated and pose a serious threat to the financial stability of the United States.”

The Chamber is applying pressure as well — it joined with other business groups on Thursday to send a letter to the FSOC requesting a public hearing on the designation rule before it is finalized. The Business Roundtable and National Association of Manufacturers signed the letter, along with seven other business groups.

Joe said the business lobby wants to make sure regulators keep the designation narrowly defined.

Joe said the Chamber was concerned because, while it joined other industry groups in providing lengthy comments to the FSOC's proposed rule, it has not received substantial feedback from the FSOC about them. Further driving concern is the fact that it is unclear whether regulators have done a cost-benefit analysis of designating a firm as systemically significant.

Exactly when the FSOC’s rule might be finalized is not known, and no deadline is laid out in Dodd-Frank. Geithner said in February that he hoped to begin designating nonbank SIFIs by the end of the year.

The process currently laid out by the FSOC envisions a complex, three-stage vetting for firms, followed by two separate votes on making the designation, including a time in-between for the firm to make their case for avoiding the title.

Joe said the process looks to be a lengthy one, suggesting that if designations roll out by the end of the year, a finalized rule could be coming “imminently.”

“FSOC would have to get something out early this summer, if not sooner,” she said.

While industry groups argue that designating too many firms could restrict financial markets, Jarsulic said the alternative is far more costly.

“It seems like the balance is so far on the side of people who want regulation to prevent this kind of crisis that their complaints are really laughable and self-serving,” he said. “It’s a small price to pay, really.”