By Jeffrey Sparshott and Victoria McGrane
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)–Top U.S. regulators on Friday took initial steps to identify when a financial firm outside the banking system becomes large or complex enough to threaten the markets.
The new Financial Stability Oversight Council, created by the Dodd-Frank financial regulation bill, is seeking public comment on draft regulations affecting large nonbank financial firms. The council held its first meeting Friday at the Treasury Department.
The new Wall Street overhaul law requires heightened oversight of financial companies that are so large, complex or interconnected that their failure could destabilize the entire financial system. Any bank holding company with more than $50 billion in assets is automatically classified as “systemically significant.”
Federal regulators also must decide which nonbanks deserve the designation. Regulators are expected to move quickly to put GE Capital and American Financial Group Inc. (AIG) in that category.
Beyond AIG and GE Capital, the potential list of targets is unclear.
The council “is hitting the ground running, which suggests that it will move quickly on new regulations,” Concept Capital analyst Jaret Seiberg said Friday. “To us, that means the government will move faster than expected to regulate large nonbank financial firms such as General Electric.”
The council–which includes officials from the Treasury, the Federal Reserve Board, the Securities and Exchange Commission and others–approved an “advanced notice of proposed rulemaking” that would spell out when nonbank financial companies require heightened supervision.
Once it’s published, it opens a 30-day period for public comment. This is an initial step toward final rules that would be put in place by March 2011.
The council plans to ask 15 multi-part questions as it works to set up criteria for bringing nonbank financial institutions further into the regulatory fold. Many look at fundamental definitions and measures, such as how to gauge the potential threat to the financial system posed by a company, what types of companies should be reviewed for potential regulation, how should the council measure a company’s activities, how should the council assess the leverage and liabilities of a company, and how should certain terms be defined.
Treasury Secretary Timothy Geithner, head of the council, said the multitude of agencies need to move carefully but quickly to implement complex new rules meant to avert another economic crisis.
Geithner, speaking broadly about the council’s mission, said the new rules should strike a careful balance that protects the independent authority of individual regulators but also induces more cooperation and collaboration.
“We’re going to try to be very careful to preserve that balance,” he said.
The council’s main mission is identifying threats and responding to emerging risks in the financial markets. But while the law sets out a framework for financial oversight, different agencies still have to interpret and enforce the law. That has led to clashes over new policies.
On Friday, regulators met behind closed doors for about an hour before opening the meeting and casting votes on the council’s structure and the rule proposal on heightened supervision. It also voted to launch a study concerning the Volcker rule, designed to discourage banks from engaging in risky trades with their own money.
A request for comments on the Volcker rule will contain a dozen questions looking at basic definitions, ways to minimize risk, banks’ relationships with private equity and hedge funds, capital limitations, which activities are historically riskiest, and the impact of international regulations.
The meeting was short on specifics. Comments from most members were brief, but occasionally pointed.
“As it is unlikely that we could ever ensure that no financial institution will fail–because surely, some will in the future–we must do our utmost to ensure that when those challenges arise, the taxpayers are not forced to stand behind those institutions and that these institutions are free to fail,” Commodity Futures Trading Commission Chairman Gary Gensler said.
The council’s voting members are the Treasury’s Geithner, Gensler, Federal Reserve Chairman Ben Bernanke, acting Comptroller of the Currency John Walsh, U.S. Securities and Exchange Commission Chairman Mary Schapiro, Federal Deposit Insurance Corp. Chairman Sheila Bair, acting director of the Federal Housing Finance Agency Edward DeMarco, and National Credit Union Administration Chairman Debbie Matz.
-By Jeffrey Sparshott and Victoria McGrane, Dow Jones Newswires; 202-862-9291; jeffrey.sparshott@dowjones.com