U.S. regulators plan to vote next week on whether to label some non-bank companies a potential risk to the financial system, a move that would put them under heightened Federal Reserve supervision, according to three people familiar with the matter.
The Financial Stability Oversight Council, created as part of the Dodd-Frank law to help prevent a future crisis, meets June 3 in a closed session at the Treasury Department. The panel voted last week to notify unidentified companies that it had completed its study of whether they are systemically important. American International Group Inc., Prudential Financial Inc. (PRU) and General Electric Co.’s finance unit, GE Capital, have all said they are in the final stage of review.
A vote would mark the strongest action by the council, which first met in October 2010, to increase oversight of specific businesses. While Dodd-Frank places bank-holding companies with more than $50 billion in assets such as Goldman Sachs Group Inc. and Citigroup Inc. (C) under increased Fed supervision, the law also gives the council responsibility for deciding which non-banks, such as insurers and asset managers, could disrupt the financial system if they failed.
Being branded systemically important is “very punitive” and shouldn’t be “viewed under any circumstances as a bailout designation,” Sheila Bair, who was on the council in 2010 and 2011 as chairman of the Federal Deposit Insurance Corp., said in an interview.
“You get more regulation and you are forced to demonstrate to the government that you can be resolved in a bankruptcy without hurting the rest of us,” Bair said. “Those are burdens, not benefits.”
The designation vote is on the agenda for the June 3 meeting, according to the people familiar with the schedule, who asked not to be named because the meeting isn’t public.
Treasury Secretary Jacob J. Lew is chairman of the council called FSOC, whose 10 voting members also include Fed Chairman Ben S. Bernanke and the chairmen of the Securities and Exchange Commission, FDIC and Commodity Futures Trading Commission. A two-thirds vote, including Lew’s, is required.
If designations are made, “it will be a fairly momentous event because it will be the culmination of a very important part of Dodd-Frank and the exercise of this authority.” said Satish Kini, co-chairman of law firm Debevoise & Plimpton LLP’s banking group in Washington.
Treasury spokeswoman Suzanne Elio declined to comment on whether a vote will be held June 3.
AIG spokesman Jim Ankner declined to comment on the designation process. Chief Executive Officer Robert Benmosche, in a May 3 conference call, said that regardless of whether the insurer is branded systemically important, “we’re going to be able to demonstrate the financial strength of this company, that our stress tests are very well-done, that we understand risk management.”
Prudential spokesman Bob DeFillippo declined to comment. Prudential has been answering FSOC staff questions over the past few months and has told Treasury and Fed officials it doesn’t think the insurer poses a potential risk to the financial system, vice chairman Mark Grier told reporters in Washington on May 7.
Russell Wilkerson, a spokesman for GE Capital, said the finance unit is already regulated by the Fed and has a “strong capital position.” He declined to comment on the FSOC designation process.
If the council designates the three companies, it may then begin considering whether to put asset managers and real estate investment trust activities under increased scrutiny, said Karen Shaw Petrou, managing partner of Washington-based Federal Financial Analytics. She said she expects the FSOC will designate few companies over the next couple of years.
“At their current course it would be a very small number, because it has taken them this long on the first ones,” she said.
The FSOC voted on May 24 to notify an undisclosed number of non-bank financial companies that it had completed its review of whether the company is systemically important. The council has 180 days from then to vote. Designated companies can request an appeal within 30 days.
Lew told the House Financial Services Committee on May 22 he hopes the council will decide “soon” and told a Senate panel a day earlier that he has “stepped on the accelerator” of Dodd-Frank implementation.
Bair, who is now a senior adviser to the Pew Charitable Trusts, said the council has taken too long. “They keep saying soon, soon, but I think they really mean it this time,” she said. “I think they will do it this time.”
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