An asterisk would suffice over an axe when it comes to big financial institutions. US lawmakers are trying to stop the Financial Stability Oversight Council from designating any more non-banks as systemically important. That's a heavy-handed response for large, interconnected firms that need to be monitored.
Republicans have been trying to dismantle the 2010 Dodd-Frank financial overhaul framework since the day it was enacted. Their latest effort quietly inserted several regulatory changes into a budget appropriations proposal to fund the government through September 2015. The Senate probably wouldn't pass it as is, rejecting for example the notion that the fledgling consumer protection bureau be subjected to congressional funding approval. It might, however, concur on preventing the likes of BlackRock from being lumped in with Citigroup and Bank of America.
In June, the Senate passed a Dodd-Frank adjustment instructing the Federal Reserve to shape capital levels for mega-insurers like AIG and Prudential differently from those of big lenders. What's more, a group of bipartisan senators also sent a letter to Treasury Secretary Jack Lew, the oversight council's chairman, to recommend that asset managers not be designated as systemic, since they have fundamentally different business models compared to banks.
With both congressional chambers seemingly agreed that changes are needed on how systemically important institutions are overseen, it's really just a question of how. The House option, to shield large non-banks from being labeled such altogether, ignores both the council's mission and crisis history. The FSOC can't hope to promote stability, its overriding mission, if it isn't allowed to keep a close eye on all large financial firms. And as AIG showed in 2008, non-banks certainly have the power to threaten the health of the banking industry.
Something more like the Senate approach would work better. Insurers, asset managers or even hedge funds shouldn't be expected to meet the same capital, leverage, or stress-testing rules that banks face. Heightened oversight, though, and greater scrutiny on issues like the challenges of liquidation would be useful. In other words, something more than one-size-fits-all is necessary when it comes to the question of too-big-to-fail.
