December 2011 - We examine factors that define a nonbank financial company (NBFC) to make it subject to possible designation, a review of the three-stage determination process and of stage 1 criteria designed by the FSOC for designation.
A key objective of the Dodd-Frank Act is to subject Systemically Important Financial Institutions (SIFIs) to enhanced prudential standards to limit any impact their distress may have on financial stability. Congress determined that any bank holding company with $50 billion or more in assets would be a SIFI, as would any foreign bank with U.S. banking operations that has worldwide assets of $50 billion or more. However, in the case of nonbank financial companies (NBFCs), Congress left the question of which NBFCs should be designated SIFIs to the Financial Stability Oversight Council (FSOC). Recently, the FSOC proposed guidance on the process and the factors that it will use to designate NBFCs as SIFIs.
In this A Closer Look, we review and analyze this latest guidance on the process and key factors leading to designation. In addition for NBFCs that believe they may be vulnerable to a SIFI designation, we also describe steps that can be taken to assess the likelihood of designation and the types of information likely to be necessary to counter any such designation in the FSOC three-stage process.
This edition should be of particular interest to insurance companies, specialty lenders, hedge funds, asset managers and other NBFCs that may be concerned about being designated as a SIFI.