MetLife’s decision to contest SIFI designation has created considerable uncertainty about future designations, especially those previously under consideration for asset managers. We do not, however, expect any firm designations by FSOC in this sector. Instead, FSOC’s focus for asset management has shifted from SIFI designation for one or another firm to identifying activities and practices across the sector that pose systemic risk either by encouraging procyclicality or complicating an orderly resolution.
This poses a particular challenge for large banks and BHCs active not only in asset management, but also providing custody banking, prime brokerage, portfolio valuation, clearing, transfer agent, or other services within the group. These BHCs face this scrutiny at a time when several have come under calls for break-up that activist investors or analysts believe will promote shareholder return. Buoyed by any risk determinations by FSOC – final or not – market demands for franchise restructuring will gain still more force.
FSOC’s focus here goes beyond the living wills that U.S. banks have filed, assessing intra-group risks in ways most resolution plans have yet to capture and also naming possible transactions that pose broader market risk no matter how well the parent can be shuttered.
In our view, U.S. BHCs are most immediately challenged by FSOC’s inquiry because the FRB will almost surely act on FSOC’s activity-and-practice conclusions. It could ring-fence operations within the BHC, limit some, require third-party validation, or otherwise break up the intra-group efficiencies that now underpin most large bank’s strategic expectations from their asset-management and related operations.
The SEC is the primary regulator for non-bank asset managers. It may or may not agree with FSOC – it notably did not do so when FSOC recommended new MMF rules. Even if it concurs, the SEC’s statutory authority to mandate structural and prudential changes across a non-bank asset manager is uncertain.
U.S. BHCs with asset-management and related operations thus face a major challenge: demonstrating that internal synergies promote long-term shareholder return, are necessary for market integrity, and do not interfere with orderly resolution.
We would be pleased to explain our analysis here in more detail and provide additional information on these issues. Please do not hesitate to inquire by sendin an e-mail to info@fedfin.com.