Legislation was introduced in Congress August 2, 2012 that would
prevent the Federal Reserve from designating nonbanks as
systemically significant. This bill is significant, because it in
effect prevents the Federal Reserve from supervising insurance
companies and other nonbanks. Under Dodd Frank, nonbank entities
that are designated as systemically important are subject to the
Federal Reserve's rules governing capital, contingency and
succession planning ("living wills"). Entities designated
as systemically significant are also subject to the FDIC's
authority.
Concerns regarding the Federal Reserve's oversight of nonbank
entities first began to surface when the Federal Reserve announced
the results of its "stress test" for large nonbank
entities, such as MetLife. After MetLife and others failed the
"stress test," it was apparent that the Federal Reserve
was trying to fit square pegs into round holes. The Federal Reserve
was employing the same metrics it had historically used to evaluate
depository banks. Those metrics do not translate well to determine
the viability and sustainability of large nonbank entities.
The proposed legislation is an extension of that square peg-round
hole argument. It seeks to prevent the Federal Reserve from
classifying nonbank entities as "too big to fail." Trade
groups argue that the designation of nonbank entities as
systemically significant would subject such entities to such
massive compliance costs, thereby forcing them out of business, or
at the very least, further stifling an economic rebound.
Critics disagree. Critics of the bill argue that allowing nonbank
entities to escape the Federal Reserve's supervision may cause
a financial panic. Thus, based on the opposing sentiments, it
appears we have come full circle to damned if you do, or damned if
you don't
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