Big firms decided on
Oversight of nonbanks part of financial stability
WASHINGTON – U.S. regulators have proposed a group of firms that aren’t banks to be deemed potential threats to the financial system that need stricter federal oversight.
The regulators didn’t name the firms or say how many it wants to designate as so big and interconnected that their potential troubles could imperil the financial system. Big insurers American International Group Inc. and Prudential Financial Inc. said they are among the firms, as did General Electric’s GE Capital.
The Financial Stability Oversight Council, which includes Treasury Secretary Jacob Lew and Federal Reserve Chairman Ben Bernanke, acted Monday in a closed meeting. It was the most significant step by the council, which was created by the financial overhaul law to help prevent another meltdown.
Nonbank financial firms include insurers, hedge funds, mutual fund companies and private equity firms. Those deemed “systemically important” would have to increase their cushion against losses, limit their use of borrowed money and submit to inspections by Fed examiners.
These firms would have 30 days to notify the council that they’re contesting the designation. The council would have to vote again to finalize each designation. If at least two-thirds of the 10 voting members agreed, the council would formally put the firm under the Fed’s supervision. Lew, the council’s chairman, would have to be among the two-thirds.
“Today, 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 in a statement.
The near-collapse of huge nonbank AIG helped trigger the 2008 financial crisis. AIG had sold guarantees on mortgage securities that forced it to pay billions of dollars after the subprime mortgage bubble burst in 2007. The government stepped in with a $182 billion bailout, the largest for any single company in the crisis.
AIG was intertwined with the financial system through its sale of mortgage-related investments to big Wall Street banks, which themselves eventually received bailouts.
The federal thrift agency had regulated AIG. But the company’s mushrooming business involving complex investments called derivatives was run out of London and elsewhere. This business fell through the regulatory cracks.
AIG, which has repaid its bailout and ended government ownership, and Prudential Financial had said they were in the council’s final round of review for a possible designation.
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