Non-bank financial companies that have more than $50bn in assets and $20bn in debt could be regulated by the Federal Reserve and required to meet tougher standards, according to a proposed rule issued by the Financial Stability Oversight Council. Many companies and trade groups lobbied hard for months in hopes that their companies would not fall under the purview of the law, fearing increased regulation. Treasury Department officials declined to estimate how many nonbank financial companies might meet the proposed standards. Several companies are obvious candidates, and a number of them have already submitted comments to the council or had meetings with Treasury Department officials on earlier drafts of the proposed rule. Possible Affected Companies. Among those companies are big insurers like the Mass Mutual Financial Group and Zurich Financial Services; hedge funds like Citadel and Paulson & Company; and asset management and mutual fund companies like BlackRock, Fidelity Investments and the Pacific Investment Management Company (PIMCO). Timothy Geithner, the Treasury secretary and chairman of the council, said the ability to designate so-called nonbank financial companies for heightened supervision was “one of the most important things that the Dodd-Frank Act did.” The Dodd-Frank Act requires the council to assess 10 considerations when evaluating a nonbank financial company, and the proposed rule anticipates grouping those into 6 categories.

• Three of those are meant to assess the potential impact of a company’s financial trouble on the broad economy, based on:  size; substitutability, or the degree to which other companies could provide the same service if a firm left the market; and interconnectedness, or linkages that might magnify a company’s financial distress and cause that distress to spread through the financial system.
• Three other categories seek to measure the vulnerability of a company to financial distress:  leverage, or level of borrowing;  liquidity risk and maturity mismatch, or its ability to meet short-term cash needs; and existing regulatory scrutiny.

Several of the large financial companies that posed the biggest threats during the financial crisis — like Lehman Brothers, Bear Stearns and A.I.G. — were not supervised by a single agency charged with monitoring their financial stability. Those companies would most likely fall under the newly proposed rules.  In addition to applying only to financial companies holding at least $50bn in assets, the rules would require companies to also meet one of several other characteristics. These would include having $20 billion in debt, $3.5 billion in derivative liabilities, a 15-to-1 leverage ratio of total assets to total equity, short-term debt measuring 10% of total assets or CDSs written against the company with at least $30 billion in notional value. Companies that meet those standards will then go through another evaluation, where the council will analyze a broad range of industry-specific measures to determine whether significant financial distress at the company could pose a threat to the country’s overall financial stability. If a company passes the first2 hurdles, it then would be considered for heightened regulation and be given a chance to rebut the assertions.  Finally, 2/3's of the oversight council, including its chairman, must vote to designate the company as systemically important, a finding that must be renewed annually. Treasury Department officials said the council would be particularly interested in comments on how to treat asset managers who invested money on behalf of others. They also said a decision about whether or not companies fell under its proposed rules would be made on a case-by-case basis.   [NY Times, 10/11/11]