US Treasury Department-Issued FAQ on SIFI Process Outlines Three Criteria
October 1, 2014 by Jeff Jeffrey
WASHINGTON – The U.S. Treasury Department has released a 22-point description of the Financial Stability Oversight Council and the process it uses for designating non-bank financial institutions that should receive additional federal oversight.
The Frequently Asked Questions document posted on Treasury’s website comes after months of criticism about the level of transparency at the FSOC.
It touches on a range of topics including ways in which the FSOC determines whether a company could pose a risk to the U.S. financial system, opening up the possibility that the company could be named a systemically important financial institution.
That process is based on three criteria: risk exposure; whether a rapid liquidation of the company’s assets could destabilize the market; and whether the company plays a “critical function” in the financial system.
To date, American International Group Inc. and Prudential Financial Inc. are the only two insurance companies to have their non-bank SIFI designations become final. MetLife Inc. has received a preliminary SIFI designation.
“The designations process is less than three years old, and the Council continues to work to balance its responsibility to be open, clear, and transparent with its financial stability mandate, which frequently involves the review of sensitive, company-specific information,” Treasury spokeswoman Suzanne Elio wrote in a blog post about the FAQ. “In the coming months, we expect that the Council will consider additional potential changes to its processes.”
Other topics included in the FAQ are questions about the FSOC’s membership, the process companies go through while being considered for a SIFI designation and what happens to a company once it receives a SIFI designation.
Regarding the latter question, the FAQ says SIFIs are subject to consolidated supervision by the Federal Reserve and must meet “enhanced prudential standards.”
The FAQ also notes the FSOC is not beholden to the findings of other international regulatory bodies, such as the G-20’s Financial Stability Board, which also has the authority to designate systemically important companies.
“Decisions reached in the FSB do not determine decisions made by the FSOC. In fact, the FSOC is under no obligation to even consider a firm identified by the FSB for designation,” the FAQ said.
In an email, Elio declined to comment on the timing of the FAQ, referring questions to the blog posted that accompanied the FAQ. But in recent weeks the FSOC has faced increased scrutiny for what has been perceived as a lack of transparency in the SIFI-designation process.
On Sept. 18, the federal government’s watchdog agency said the steps taken by the FSOC to guard against emerging threats to the financial system and to improve transparency did not go far enough to ensure the public confidence that systemic risks could be avoided (Best’s News Service, Sept. 18, 2014).
The U.S. Government Accountability Office said the FSOC’s progress was “encouraging.” But the GAO said the council still lacks a comprehensive, systematic approach to identifying emerging threats.
The report also took aim at the FSOC’s apparent lack of transparency in its process for designating SIFIs.
Despite adopting a revised transparency policy in May, there are still areas where the FSOC could improve its communications to the public, the GAO said.
The GAO recommended the FSOC go further in providing detailed records of closed-door meetings, even as it works to protect confidential financial information. The GAO also said the FSOC should make recommendations in its annual reports more specific by identifying which member agencies will monitor or take action on specific risks.
Finally, the GAO recommended the FSOC establish a comprehensive framework for assessing the impact of SIFI designations for non-bank financial companies, including insurers.