On Monday, US regulators named lender GE Capital and insurance giants Prudential Financial and AIG as non-bank systemically important financial institutions (SIFIs)—aka non-bank firms whose failure could disrupt the entire US economy (paywall). The three firms will now be required to disclose more financial information and face stricter oversight from the Federal Reserve.
Banks also go through a systemic risk assessment, both by local regulators and by the G20. If named “systemically important,” they are forced to write plans about how they would wind down their businesses in the case of collapse. Also, they will soon face higher capital standards based on their size.
By designating including non-banks in that group, regulators hope they can keep better track of large financial firms that fall outside of the traditional banking system.
Regulators have worried that tighter regulation for banks will shift risk-taking onto hedge funds, private equity funds, and other alternative asset managers, which will play a bigger role in the financial system. For example, traditional private equity and leveraged buyout firms have been diversifying, particularly since the end of the financial crisis. They are focusing less on specific companies and more on opportunities to buy distressed loan portfolios, ships, and even tracts of land.
The three institutions named above aren’t the only non-bank players, nor are they the most important. In future, people familiar with the regulatory process believe large asset managers like Blackrock and Sallie Mae could end up on the list of systematically important firms.
Critics of these plans point out a potential problem: designating more firms “systemically important” may actually incentivize risk-taking, rather than discouraging it. As with “too big to fail” banks, the designation suggests that the government would backstop their risk-taking if they failed, and it could give them easier access to cheap funding. That’s just the opposite of what the Dodd-Frank Wall Street reforms were all about.