Following the April 3 agreement by U.S. regulators on criteria used to designate nonbank systemically important financial institutions, also known as SIFIs, nonbank institutions could be affected by the end of the year.
The procedures in designating a SIFI were unveiled last week by the Financial Stability Oversight Council and the Federal Reserve, according to Deal Pipeline.
Ed Yingling, a partner at Covington & Burling LLP and a former president of the American Bankers Association, predicted that the FSOC would initially choose three or four firms for designation, the selection of which may be a forethought.
“I think they have a pretty good indication of who is likely to be designated,” Yingling said, Deal Pipeline reports. “I suspect a lot of the work has already been done.”
Under the 2010 Dodd-Frank Act, regulators were given increased oversight and control over financial firms that are not considered banks but play a critical role in the U.S. financial system.
Designation as a SIFI ultimately means not only increased criticism but direct regulation by the Federal Reserve and possible increased capital requirements. Institutions designated as SIFIs are also required to design “living wills,” comprehensive exit strategies that would be used in the event of a firm’s failure.
Though regulators did make minor changes to the final criteria, financial lawyers say that most of the changes simply clarify procedure.
The FSOC has the authority to designate as a SIFI any institution that “pose[s] a significant threat to U.S. financial stability.” The FSOC, however, said that its focus for initial designations will be firms that have an excess of $50 billion in assets and either $20 billion in total outstanding debt, a 10 percent ratio of short-term debt to assets, $30 billion in credit default derivatives, $3.5 billion in derivatives liability or a 15-to-one leverage ratio, according to Deal Pipeline.