Continuing FedFin’s review of the Obama plan to rewrite the financial-services industry, this report assesses the systemic-risk regulatory framework, focusing on the powers Treasury and the FRB would get and what this would mean for any firm dubbed to pose systemic risk and for all current bank holding companies. We conclude that the result will break apart many firms now deemed too big to fail, leaving only a few colossi intact in a regulatory structure akin to that governing public utilities. An early warning signal for this utility approach is the pending plan – made public today – in which the FRB would take repurchase-agreement clearing away from the biggest U.S. banks and house it in a new utility under its control. This report details the new prudential standards applicable to systemic-risk institutions –regardless of whether they own an insured depository – noting how likely they are to govern GSEs, foreign firms, big non-banks and similar entities. However, in a little-noticed section, the framework would also change the rules for all bank holding companies, not just large ones. Thus, this report also addresses the way regulation could change even if a firm does not trip the systemic-risk trigger.

We continue to believe that regulators will move as much of this plan as quickly as they can without statutory change, doing so both to meet current supervisory priorities and to moot as much as possible of the political battle over the substance of the new regulatory framework, which would then be in place for current financial holding companies regardless of how the battle over an FRB versus a council systemic regulator is ultimately resolved by Congress. We will assess the broader impact this proposal will have for the FRB’s role as a central bank – a critical question one for Congress, of course – in a separate report and we will also shortly analyze the new systemic-resolution framework along with other key sections of the plan. The FedFin Weekly Alert of June 22 provided our current political forecast for the plan as a whole.

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