WASHINGTON — Republicans in the House and Senate introduced legislation Thursday that would repeal the government's authority to designate non-bank financial institutions as systemically important.

The House bill is being sponsored by Rep. Scott Garrett of New Jersey, while the Senate version was introduced by Sen. David Vitter of Louisiana.

Under the Dodd-Frank Act, the Financial Stability Oversight Council was given responsibility for designating certain non-banks as systemically important, a label that will subject them to enhanced regulation by the Federal Reserve System.

The legislation's sponsors argue that as a result of the designations, market participants will perceive that the government will not allow those firms to fail.

"We cannot allow 'Too-Big-To-Fail' to take root in our non-bank financial institutions," Garrett said in a press release. "These institutions must not be allowed to be captured in the same regulatory scheme that will protect them from market forces, stifle innovation and creativity in the broader financial sector, and ensure taxpayers remain on the hook for their failure."

Vitter added in a statement: "Dodd-Frank took the problem that led to the Wall Street bailouts, and made it the standard. Now we're seeing the problem expanding.  This bill is a modest first step in rolling back the expansion of the bailout state that Dodd-Frank enshrined."

A key premise of the bill — the idea that the designations will provide incumbent firms an advantage in the marketplace — is controversial.

Indeed, many large non-banks have been seeking to avoid being designated as systemically important, presumably because they view the label as a disadvantage.

Last month, the Financial Stability Oversight Council, in its first use of the new authority, voted to designate eight financial-market utilities as systemically important.

The legislation introduced Thursday has no real chance of enactment in 2012. But if Republicans win control of both houses of Congress and the White House in November, the measure could be considered next year as part of a package of changes to Dodd-Frank.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.