Fitch: Nonbank Financial Firms One Step Closer to SIFI Unveiling

Fitch Ratings notes nonbank financial companies are one step closer to finding out if regulators view them as systemically important institutions.

On Tuesday, the U.S. Financial Stability Oversight Council (FSOC) finalized criteria that will help regulators determine which nonbank financial companies should be deemed systemically important financial institutions, or SIFIs. That designation will place the companies under additional regulation, courtesy of the Federal Reserve.

While we think a number of firms likely meet nonbank SIFI criteria under the now approved guidelines, FSOC will ultimately determine which receive SIFI designation, based on quantitative and qualitative considerations. Some companies have begun the process of repositioning their business activities and their risk management/reporting systems in anticipation of a SIFI designation while waiting for official notification. MetLife, AIG, Berkshire, GECC, and Prudential are among the potential candidates for SIFI branding given their sizable assets and interconnectedness with the financial markets.

Much like those banks already classified as SIFIs, nonbank SIFIs can expect increased regulatory burden and cost associated with the designation. One potential offset is the creation of a barrier to entry, or prevention of sizable competitors emerging.

We also believe costs for nonbank SIFIs are apt to increase given additional reporting and monitoring challenges. For example, nonbank SIFIs will likely include a diverse set of business models with different risk drivers. Fitting those business models into a uniform reporting framework is likely to prove problematic and/or expensive.

Also similar to the banking sector, we would expect to see players at the cusp of SIFI thresholds to more actively manage their positions to avoid a SIFI classification. This could be challenging given the subjective nature of the nonbank SIFI determination process versus the bank SIFI one. Bank eligibility for SIFI designation relies more heavily on assets versus the nonbank criteria.

We also believe that while consumers may benefit from more financially stable service providers, they could also become subject to increased costs via higher insurance premiums and financing costs. Certain lines of businesses might also cease if they no longer proved cost effective as a result of the change.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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