U.S. regulators to move closer to designating systemic firms

April 2 (Bloomberg) -- The U.S. Treasury Department and regulators will move one step closer tomorrow to designating some companies as posing a risk to the country’s financial system in the event of their failure.

The Financial Stability Oversight Council will hold a meeting at which it will finalize criteria for singling out non-bank financial companies as systemically important and thus subject to greater supervision, the U.S. Treasury Department said.

The final rule is FSOC’s second attempt to define metrics and a procedure for designating non-bank companies as systemic. Federal Reserve Chairman Ben S. Bernanke said March 29 that FSOC’s designation tool is a way regulators have become more prepared for a crisis.

FSOC “can designate any institution which it views as not being adequately regulated to come under the supervision of the Federal Reserve,” Bernanke said in a March 29 lecture. “And that’s a process that’s going on now, so there will not be any more large, complex, systemically critical firms that have no oversight.”

The FSOC, headed by Treasury Secretary Timothy F. Geithner, proposed a rule in October that set standards for determining which non-bank firms require Federal Reserve scrutiny. Banks with over $50 billion in assets were automatically deemed risky to the financial system in the event of their failure.

Final Rule

The final rule regulators will approve tomorrow will be largely unchanged from that proposed in October, said officials familiar with the deliberations who spoke on condition of not being further identified. The wording, however, can be changed until the vote is taken.

“It is an important step in the whole Dodd-Frank reform,” said Edward Hida, the global leader of risk and capital management for Deloitte & Touche LLP. “Systemic risk is one of the most important elements of the Dodd-Frank reform and building that into the oversight of regulation through FSOC and designation is the cornerstone.”

Under the October proposal, regulators will evaluate non-bank financial companies with more than $50 billion in assets if they meet any one or more of the following thresholds: A 15-to-1 leverage ratio; $3.5 billion in liabilities on derivatives contracts; $20 billion of outstanding loans borrowed and bonds issued; $30 billion in gross notional credit-default swaps outstanding; or a 10 percent ratio of short-term debt to assets.

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