The U.S. Financial Stability Oversight Council approved a final rule on Tuesday that would assist the council in identifying non-bank institutions that are systemically risky and require further examination by the Federal Reserve.Led by Treasury Secretary Timothy F. Geithner, the panel identified the criteria needed to label the firms that could be deemed systemically important and potentially risky for the U.S. financial system. The rule emerges following two unsuccessful attempts by the council to establish finalized systemic risk standards.
“This interpretive guidance is an important tool provided in Dodd-Frank for extending the parameter of transparency oversight and prudential supervision over parts of the financial system that can be a particularly important source of credit to the economy and potentially important source of risk in crisis,” Geithner said, according to Bloomberg.
The final rule is a derivative of the one regulators proposed in October. In accordance with the final rule, regulators will assess those non-bank institutions that meet one or more of the following criteria: 15-to-1 leverage ratio, $3.5 billion in liabilities on derivatives contracts, $30 billion in outstanding gross credit-default swaps, 10 percent ratio of short-term debt to assets or $20 billion in outstanding loans and bonds, Bloomberg reports.
In a three-step process, the FSOC will then consider additional information pertaining to the bank’s connections, risk and size in order to determine a subset of non-bank institutions.
The council retained a stipulation in the rule that allows it to designate, regardless of how the institution may or may not meet the criteria, those institutions that pose a significant systemic risk to U.S. financial stability.
Under the 2010 Dodd-Frank Act, banks that possess more than $50 billion in assets can automatically be labeled as risky to the financial system should the companies fail. Through the establishment of standards, the U.S. will be able assist the Financial Stability Board in determining standards for those institutions that pose a globally systemic risk, Bloomberg reports.
As the council acquires more data, the FSOC said in the rule that it will consistently reevaluate the criteria as part of an ongoing process of determination.