With the comment period now closed on its proposed rule, the Financial Stability Oversight Council (FSOC) is getting ready to outline the terms for deciding which nonbank financial institutions might cause instability in the U.S. financial system if they fail. As its staff works away on decision criteria, they should be offered one word of advice: stop.
The council was set up by the Dodd-Frank Act and is made up of virtually all the federal government’s financial regulators. It is authorized to use such criteria as size, interconnectedness and “mix of activities” to decide whether, in effect, a nonbank financial institution is too big to fail.
The legislation already specifies that all banks or bank holding companies with assets of more than $50 billion are automatically included in this category, but the FSOC now must decide what other financial institutions–insurance companies, financial holding companies, securities firms, finance companies, hedge funds and private equity firms, among others–are also dangers to the financial system’s stability. Under the terms of Dodd-Frank, if firms are designated as potential sources of “instability,” they will be subject to “stringent” regulation by the Federal Reserve.