Under a three-step process, the council will use additional data, including size, interconnectedness and liquidity risk to identify a subset of non-bank financial companies. The council will use publicly available figures to analyze the companies, and then regulators will contact the firm in question to collect more information.
FSOC will retain a provision that the panel will have the flexibility to designate any company as systemically important even it doesn’t meet any of the criteria, according to the people familiar with the deliberations.
Geithner said Feb. 2 that the first non-bank companies to be deemed systemically risky will be named this year.
Under the Dodd-Frank act, once the FSOC designates companies as systemic, the Fed would then subject these firms to heightened standards, including raising capital and reducing risky practices. The companies also would have to file “living wills” so they could be unwound in an orderly way if they failed.
Plans to designate systemically risky firms were set back after lawmakers and industry executives complained that the initial proposed criteria, released in January 2011, were too vague. FSOC responded in October with a new proposal with metrics for designation.
Even after the rule is final, it is unclear how long it will take FSOC to begin designations.
“They probably need to proceed carefully because there could be court challenges, there could be other procedural hurdles.” said Satish Kini, co-chairman of the banking group at law firm Debevoise & Plimpton LLP. “Congress is going to be interested in how they go about this.”
“They know this is a task that is not going to make any friends for the administration,” said Ernest Patrikis, a partner at the law firm White & Case LLC and a former general counsel at the Federal Reserve Bank of New York. “Politically it’s not an easy task because even if you meet certain criteria there are going to be significant costs.”