WASHINGTON The Federal Deposit Insurance Corp. Tuesday clarified the kinds of financial firms that can be resolved by a new mechanism meant to limit the systemic effects of company failures.
Under the Dodd-Frank Act, the government can appoint the FDIC as receiver for failed financial behemoths that authorities deem too complex and interconnected to be resolved through bankruptcy. Generally, the law said bank holding companies and those subject to a new supervision framework for systemically important nonbanks could potentially be targeted by the new resolution process.
But Dodd-Frank left it to the FDIC to regulate what constitutes other types of financial activities potentially subject to the wind-down regime. The law basically said firms with at least 85% of their consolidated revenues coming from financial activities could theoretically qualify, but called on the agency to define "financial" and how a firm meets the 85% test.
In a final rule, the FDIC board said a firm meets the 85% requirement if its revenues hit that threshold in either of the two mostly recently completed fiscal years, or alternatively if the company's revenues are at least 85% financial "based upon all of the relevant facts and circumstances."
The agency referenced previous Federal Reserve Board policies in defining what activities are considered "financial" in nature, although with some slight variations and exceptions from Fed standards. In April, the central bank completed a similar rule required under Dodd-Frank on what constitutes a financial firm that could be designated by the Financial Stability Oversight Council as a systemically risky nonbank and therefore face heightened Fed supervision.
Some of the activities considered "financial" under the FDIC rule include, among others, lending or investing on behalf of others; insuring or indemnifying against losses; providing financial, investment or economic advisory services; and underwriting, dealing in or making a market in securities. The definition also includes a laundry list of activities that the Fed has determined are "closely related to banking or managing banks." Those include, for example, extending credit and servicing loans; real estate appraisals; and arranging commercial real estate equity financing.