WASHINGTON — Nonbank financial firms with more than $50 billion in total consolidated assets could be subject to further evaluation for designation as systemically important under a proposal issued Tuesday.
The Financial Stability Oversight Council approved a proposal that would subject those companies to additional consideration if they meet one of five other quantitative thresholds: $30 billion in gross notional credit swaps outstanding; $3.5 billion in derivative liabilities; $20 billion of outstanding loans borrowed and bonds issues; 15-to-1 leverage ratio, as measured by total consolidated assets to total equity; or 10% ratio of short-term debt to total consolidated assets. The public will have 60 days to comment on the proposal.
Treasury Secretary Timothy Geithner, who chairs the council, said the proposal is the result of one of the most important steps taken by last year's Dodd-Frank Act. At the same time, he noted that regulators have other tools at their disposal as they seek to ensure financial stability.
"So we're trying to take a comprehensive approach to looking at where risk is in the system," Geithner said during Tuesday's meeting. "This is one of the tools, it's one of the most important tools, but it's not going to be the only tool we're going to be relying on."
Federal Reserve Chairman Ben Bernanke, who is also a member of the council, called the proposal a step forward.
"It provides more clarity, is more quantitative, and in fact is based on data in the public domain," Bernanke said during the meeting.
SEC Chairman Mary Schapiro encouraged the public to provide input on the proposal, saying that "we may not have all the thresholds and metrics exactly right."
Under the Dodd-Frank Act, any bank with more than $50 billion of assets is considered systemically important and subject to restrictions and supervision by the Fed. But the law left it up to regulators to determine what financial nonbanks would fall into that definition.
The proposal said a nonbank that meets one of the thresholds will not necessarily be designated as systemically important.
Under the three-stage designation process, the council will first identify the firms that meet the uniform thresholds, then analyze the company primarily through existing public and regulatory information. In the third stage, FSOC will finally contact each firm to request additional information, notify them that could be designated and provide them an opportunity to respond to the council's consideration.
The council will take into account each individual firm's risk profile, as well as other metrics that are specific to its industry. It will also assess the potential impact of a company's financial distress on the broader economy based on its size, "substitutability" and interconnectedness. And it will consider a company's vulnerability to financial distress based on its leverage, liquidity risk and maturity mismatch, and existing regulatory scrutiny.
After the third stage, the council would have 60 days to vote — by at least a two-thirds majority — on whether or not to designate the firm, which would subject it to supervision by the Federal Reserve Board and enhanced prudential standards.
Once a firm is designated, the council must reevaluate the designation every year.