Council proposes framework for designating nonbanks' systemic importance
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Silicon Valley Bank was systemically important. When SVB failed, Signature Bank — a New York regional bank known mainly for lending to Broadway, and which came unstuck in crypto — turned out to be systemically important, too. If they were important, who isn't?
Why it matters: The Financial Stability Oversight Council, the top body overseeing the strength and resilience of the financial system, last week released "a new proposed analytic framework for financial stability risks."
- In English: It wants to more easily be able to designate nonbanks as being systemically important.
The big picture: In a complex modern financial system, it's easy to imagine a case where a nonbank turns out to be systemically important.
- Insurance company AIG had to be bailed out in 2008 for that reason, for instance.
- Hedge fund LTCM caused its own potentially systemic crisis 20 years earlier, and the New York Federal Reserve needed to mobilize a rescue operation.
What they're saying: The current designation process "could take six years to complete," said Treasury Secretary Janet Yellen in a speech on Friday.
- "That is an unrealistic timeline that could prevent the Council from acting to address an emerging risk to financial stability before it's too late."
Between the lines: The fact sheet laying out the new framework is expansive in its interpretation of who (or what) could be systemically important. It includes "central counterparties," for instance (all exchanges), as well as asset managers, mortgage servicers and many others.
Our thought bubble: One intriguing possibility is that Bloomberg LP, the financial-information giant, could be designated as systemically important.
- Enormous quantities of highly confidential information pass through Bloomberg's servers every day; a breach could be catastrophic.
- As the FT's Robin Wigglesworth recounts, one brief Bloomberg outage already forced the U.K. government to postpone a 2015 debt issuance.
The bottom line: Banks are obviously systemically important. But regulators need to be worried about much more than just banks.
