The House FinServ Financial Institutions Subcommittee convened a hearing today to examine systemic designation of nonbank financial institutions, with members on both sides of the aisle questioning how the FRB’s proposed enhanced prudential standards (see FSM Reports SYSTEMIC54 & 55) will apply to nonbanks. FRB Director Michael Gibson acknowledged the Sec. 165 framework is bank-centric, but said the Fed will tailor the standards for each designated company once the rule is finalized. This differs with the pending proposal, which suggests that the FRB will issue a separate set of prudential standards for nonbanks based on their business focus. Republican Members grilled Mr. Gibson on the Board’s proposed definition of “predominantly engaged in financial activities” (see FSM Report SYSTEMIC59), a key criterion for systemic designation, arguing that it gives the Federal Reserve too much discretion and may capture an overly-broad range of companies. The GOP also questioned the designation process in general, suggesting that it does little to answer the question of TBTF and, instead, confirms market expectations that SIFIs will be bailed out by the government.
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