CRS Insights
Designating Systemically Important Financial Institutions (SIFIs)
Marc Labonte, Specialist in Macroeconomic Policy (mlabonte@crs.loc.gov, 7-0640)
March 20, 2015 (IN10141)
The 2008 financial crisis resulted in government assistance to rescue several financial firms that were
considered "too big to fail" (TBTF) because their failure would cause unacceptable disruptions to the
overall financial system. Some of these were non-bank financial firms, including Bear Stearns, Fannie
Mae, Freddie Mac, and AIG. A number of approaches (detailed in this CRS report) have been suggested
to solve the "too big to fail" problem, some of which were enacted in the Dodd-Frank Act (P.L. 111-
203).
Central to the Dodd-Frank approach was the creation of a heightened prudential regulatory regime for
"systemically important" financial firms to be administered by the Federal Reserve (the Fed). Under this
regime, the Fed is required to set heightened standards for capital, liquidity, risk management,
resolution plans, stress tests, early remediation, and concentration limits. The Fed may tailor these
standards to account for differences between different types of firms. All bank holding companies with
$50 billion or more in assets are automatically subject to the heightened prudential regime. In addition,
the Financial Stability Oversight Council (FSOC), a council of regulators, was authorized to designate
non-bank financial firms as systemically important by a qualified two-thirds vote. FSOC is headed by
the Treasury Secretary, and a designation requires his approval. To date, FSOC has designated four
non-banks as systemically important financial institutions (SIFIs)—the insurers AIG, MetLife, and
Prudential and the non-bank lender GE Capital. MetLife announced that it is challenging its designation
in court. FSOC is considering whether to designate firms in other sectors of the financial system, and
recently held a conference on the potential systemic importance of asset managers.
Economic theory suggests that expectations that the government will prevent a firm from failing create
moral hazard—if the creditors and counterparties of a TBTF firm believe that the government will
protect them from losses, they have less incentive to monitor the firm's riskiness because they are
shielded from the negative consequences of those risks. If successful, heightened prudential regulation
could offset the moral hazard problem by limiting risk taking. If financial firms are perceived as "too big
to fail," they may be able to borrow at lower rates than other firms. In principle, heightened prudential
regulatory standards could offset this funding advantage, thereby creating a level playing field for small
and large firms. To date, the Fed has not promulgated regulations for the non-bank SIFI prudential
regime.
Congressional Concerns
Some Members of Congress have expressed concerns with the SIFI regime. Congressional concerns
related to non-bank SIFIs include the following:
Does the SIFI regime reduce or increase moral hazard?
Do financial actors view FSOC designation as explicitly identifying which firms the government
considers to be TBTF, thereby increasing expectations of future government assistance?
Will the Fed's heightened regulatory regime be tough enough to penalize systemic importance? If
not, and if SIFI-designation confers a funding advantage, firms could find it advantageous to be
designated.
Is the FSOC sufficiently accountable?
Is the FSOC designation process transparent enough? The FSOC has finalized a rule explaining in
general terms the criteria it considers when making a designation, and once a designation is
made, it releases a document explaining why that firm was designated. Public disclosure of more
information is complicated by the confidential nature of some of the information involved.
Is the designation process objective? Is FSOC open to evidence presented by firms under
consideration that they are not systemically important? The Dodd-Frank Act allows a non-bank

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SIFI to request a hearing before the FSOC before the designation is made and appeal its
designation in federal court after the fact.
Has the FSOC designation process been superseded by a similar process for global financial firms
carried out by the Financial Stability Board (FSB), an intergovernmental body in which the United
States participates in? Are the FSB standards compatible with U.S. statute? To date, the FSB has
designated 30 banks and 9 insurers as globally systemically important, and is in the process of
designating other types of financial firms. The FSB designation is being used in U.S. regulation,
such as to determine which banks will be assessed a capital surcharge under Basel III.
How can systemic risk best be mitigated?
Might types of firms that were not central to the recent crisis, such as asset managers, be a
source of systemic risk in the future? The Office of Financial Research recently noted that there
were 10 asset management firms with more than $1 trillion of assets under management. Critics
claim that their size does not pose systemic risk because they are only custodians of their clients'
funds and they are not prone to disorderly failures, as was evidenced in the crisis.
Does systemic risk primarily stem from individual firms or activities? If the latter, it would
arguably be appropriate to regulate the activity directly. Otherwise, systemic risk might migrate to
less regulated firms.
How should non-banks be regulated?
Does the Fed have the expertise to effectively regulate non-banks? Does each industry need its
own regulatory model or can banking regulations be adapted to match the business models of
non-banks?
Are insurance firms already adequately regulated for safety and soundness at the state level, thus
obviating the need for the Fed's heightened regime? Are state insurance regulators adequately
regulating the activities of non-insurance subsidiaries and taking into account systemic risk
concerns?
Will the Fed's heightened prudential regime increase or reduce financial innovation, credit growth,
and credit availability?
Legislative Activity in the 113th Congress
In the 113th Congress, H.R. 4881, as ordered to be reported by the House Financial Services
Committee, would have placed a one-year moratorium on FSOC designations. P.L. 113-279 allows the
Fed to exempt insurers from the "Collins Amendment"—bank capital standards that would otherwise
apply because the insurers are SIFIs or bank holding companies.

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