Survey of the SIFI Landscape  (Mar. 9)

Mike & Co. —

It may feel like Michigan-morning-after but by dint of Mississippi, HRC padded her delegate lead last night.

On Monday,  President Obama held a financial regulatory summit in the Roosevelt Room of the White House.  Joined by the heads of the Fed, the FDIC, and the CFPB, Obama declared “I want to dispel the notion that exists both on the left and on the right that somehow, after the crisis, nothing happened,” he said. “We did not just rebuild this, we rebuilt it better, and we’ve rebuilt it stronger.”

He has a strong argument.  You can’t prove a negative and we will never know how many financial crises were averted by Dodd-Frank.  But metrics bear out the view that Americans and the economy have less to fear today from the Systemically Significant Financial Institutions (SIFIs) than at any time since the turn of the millennium.  More on the regulatory circumstances of SIFIs below.




A Survey of the SIFI Landscape

The landscape for the eight SIFIs today — Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley, State Street, and Wells Fargo — is worth looking at from various perspectives.  Presidential candidates on both sides have made a point of criticizing “too big to fail” banks, court proceedings are challenging regulators powers’, members of Congress are debating whether to loosen Dodd-Frank Act SIFI rules, and a current Federal Reserve Bank president has spoken out in favor of breaking them up.  But do SIFIs pose the same threat they did in 2008?

The Power of DFA

President Obama hasn’t remained silent in the face of criticism of DFA.  After the Monday summit, Obama said that critics are spreading “cynicism”:  “It is popular … to suggest that the crisis happened and nothing changed.  That is not true.”  The President cited the 14 million new jobs created since his inauguration, proof, he said, that sensible regulations on Wall Street don’t stifle business growth.

Two major business news stories from 2015 support the President’s view:

·   General Electric continued to sell off GE Capital, its $42 billion investment arm, hoping to exit SIFI status in Q1 2016 as a result of its divestiture.

·   MetLife has been embroiled in a legal battle with the Financial Stability Oversight Council (FSOC) since the regulator announced in December 2014 that the insurance company was considered a SIFI – arguments were heard in New York this January.

70 percent of DFA has been implemented by the regulatory agencies since it was passed.   Despite the constraints on SIFIs, they have by and large adapted well, making adjustments faster, earlier and more successfully” than their overseas counterparts.

·   SIFIs now hold much more capital now than they did before the crisis – to the tune of $700 billion in additional capital, twice the amount prior to it

·   SIFIs have three times the liquidity they had before the crisis

·   Derivatives clearing houses force transparency on SIFI speculation, preventing over-exposure

·    SIFIs now post collateral on their derivatives trades

·    SIFIs submit to rigorous stress testing by the Federal Reserve and FDIC

·    SIFIs are being forced to draft “living wills,” which have already forced some to streamline or simplify so they can wind down without requiring a bailout

Congressional Update

Congress is split between those who want to reduce regulatory pressure on big banks and those who would rather see it ramped up.  Sen. Shelby, Senate Banking Chair, introduced the Financial Regulatory Improvement Act of 2015, a grab-bag of exceptions and exemptions from regulations, mostly for bankswith between $50 and $500 billion in assets.  In a similar vein, Sens Warner, Portman, and Collins introduced the Independent Agency Regulatory Analysis Act to require that regulators undertake a cost-benefit analysis of any rules they wish to implement.

On the flip side, Sens. McCain and Warren’s 21st Century Glass-Steagall Act proposes to split commercial and investment banks in a bid to finally kill off the TBTF problem.  Sens. Warren and Vitter teamed up early in 2015 to introduce a package of amendments to the Federal Reserve Act –- that bill notably would set forward stricter regulations when an entity is considered insolvent, and therefore ineligible for Federal Reserve loans, as well as require that the Fed lend money to distressed institutions at market rates.

The Regulators’ Agenda

Under Basel III requirements for large banks to satisfy Liquidity Coverage Ratios (LCR) were adopted by a number of national regulators, including the Federal Reserve.  While the Fed has floated a rule change allowing some municipal bonds to count as High Quality Liquid Assets (HQLA), that hasn’t stopped Rep. Luke Messer from proposing HR 2209 to force regulators allow a greater share of munis to count as HQLA (see Update, Feb. 18).

The Fed is also working on implementing a rule on Single-Counterparty Credit Limits (SCCL), setting boundaries on credit exposure between large banks or major counterparties.  The rule is meant to prevent banks from becoming overexposed to other financial institutions, preventing them from taking overly large losses in the event that the counterparty fails.  Analysts suspect that firms are nearly $100 billion over the limits imposed by this rule, but Yellen says it is necessary to set a “bright line” on credit exposure.

SIFIs Moving Forward

There is no doubt that the upcoming MetLife ruling will be a critical pivot point for how regulators interact with SIFIs.  If the FSOC is required to retract the firm’s SIFI status it will open the regulator up for a whole slew of challenges from other banks and institutions.  The fate of Congressional proposals to restrict regulator’s efforts, either by determining rules for them or by burdening them with regulations of their own, should be seen as the start of a potential sea change in the regulatory climate.  During his Monday meeting, President Obama warned of this: “If there is a significant challenge in terms of regulating Wall Street and regulating our financial sector it is primarily coming from certain members of Congress who are consistently pressuring independent regulators to back off.”

It is not a bad time to be a SIFI in America – it’s certainly much better to be one now than in 2010.  While DFA has forced restructuring and streamlining to occur, events like the GE Capital sell-off may prove to be exceptions that prove the rule rather than the new normal for SIFIs, especially if MetLife wins its case against regulators.  President Obama was right to point to Congress as the cause of regulatory gridlock; the political will seen after the economic collapse has largely evaporated, giving SIFIs far more breathing room and opening up opportunities to push through “regulatory reform” measures.

37 thoughts on “Survey of the SIFI Landscape  (Mar. 9)”

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