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BPC’s Justin Schardin: Curbing Bad Apples Won’t Erase Contagion Risk

American Banker

Monday, May 2, 2016

A federal court decision in March striking down the designation of MetLife as a “systemically important financial institution” has sparked a lively debate on the Financial Stability Oversight Council’s ability to prevent future financial crises. But for all the attention paid to the court ruling, it does not directly address what the council must do to succeed.

In the Dodd-Frank Act, Congress wisely gave regulators greater authority to address systemic risk originating outside the banking sector by letting FSOC designate nonbank financial firms as SIFIs. The MetLife decision doesn’t remove this powerful tool. Even if the government loses its appeal, FSOC could still take another crack at designating the insurer by addressing flaws in the council’s SIFI designation process identified by the courts.

More important, independent of the legal battle, FSOC’s designation authority as granted by Congress has several practical limitations.

For one thing, a designation is an either-or decision. FSOC can’t designate every large nonbank financial firm, meaning the process is always going to be somewhat subjective.

KEYWORDS: 2008 FINANCIAL CRISIS, BPC OP-EDS, DODD-FRANK ACT, FINANCIAL STABILITY OVERSIGHT COUNCIL (FSOC), JUSTIN SCHARDIN, SIFIS