The Financial Stability Oversight Council voted on Monday to place non-bank firms, which include private equity firms and hedge funds, that pose systemic risk to the financial system under enhanced regulatory supervision.
Though the council, headed by Treasury Secretary Jack Lew, did not name the firms it designated as systemically important, AIG, GE Capital and Prudential said they are among the firms that received designation, The Washington Post reports.
“The council took another important step forward by exercising one of its principal authorities to protect taxpayers, reduce risk in the financial system and promote financial stability,” Lew said, according to The Washington Post.
Some analysts maintain that designated firms enjoy what the market perceives as an implicit guarantee that the government will bail them out in the event of their failure.
Jeb Hensarling, the chairman of the House Financial Services Committee, echoed that sentiment, saying “too big to fail” designations are “bad policy and even worse economics.”
“Today, all because of the Dodd-Frank Act, hardworking taxpayers are at greater risk of being forced to fund yet another Wall Street bailout as their government officially designates more large companies as being ‘too big to fail’,” Hensarling said. “It causes erosion of market discipline…[and] also becomes a self-fulfilling prophecy by giving these firms market advantages over their competitors, helping to make them even bigger and riskier than they otherwise would be. Taxpayer-funded bailouts reward bad behavior. Taxpayers should not be held responsible for the failure of big businesses any longer. Unfortunately, Dodd-Frank codifies bailouts of ‘too big to fail’ firms into law. Our committee is working to put a stop to bailouts and end ‘too big to fail’ forever.”