What is a Systemically Important Financial Institution (SIFI)?
A systemically important financial institution (SIFI) is a bank, insurance, or other financial institution (FI) that the United States federal regulators determine would pose a serious risk to the economy if it were to collapse. A SIFI is considered as “too big to fail” and imposed additional regulatory burdens to prevent it from sinking.
Key points to remember
- A systemically important financial institution (SIFI) is a company that US regulators believe would pose a serious risk to the economy if it were to collapse.
- This label imposes additional regulatory requirements and increased oversight, including strict oversight by the Federal Reserve, higher capital requirements, periodic stress testing, and the need to produce “living wills.”
- Former President Donald Trump signed a bill to reduce parts of the Dodd-Frank Act, increasing the threshold that determines which companies qualify as SIFIs.
- The changes were expected to help many mid-sized financial institutions save millions in regulatory compliance costs and give them greater flexibility to grow their businesses.
Understanding Systemically Important Financial Institutions (SIFIs)
The Great Recession was mainly blamed on financial companies taking too much risk. Regulators acknowledged that further scrutiny in the future would be paramount to preventing a repeat, noting that many companies in this industry are deeply entrenched in the functionality of the economy or, as they say: too big, complex and interconnected to fail.
The Dodd-Frank Act of 2010 established the Financial Stability Supervisory Board (FSC), giving it the power to qualify banks and other FIs as SIFIs. The aim was to prevent a repeat of the 2008 financial crisis, which saw largely unregulated institutions like American International Group Inc. require large taxpayer-funded bailouts. Financial reasoning contagion could come from unexpected places, lawmakers created the FSOC to screen companies based on the risk posed by their size, financial condition, business models and interconnectedness with other areas of the economy.
The SIFI label imposes additional regulatory requirements and increased control. These include strict supervision by the Federal Reserve (Fed), higher capital requirements, stress testingand the need to produce “living wills” – plans for winding up operations without triggering a financial crisis or requiring a bailout.
Financial institutions (FIs) showing signs of stress being tested are required to postpone share buybacks, reduce dividend plans and, if necessary, raise additional capital.
Requirements for systemically important financial institutions (SIFIs)
The process for determining which companies are SIFIs has undergone some changes in recent years. Previously, FIs with more than $50 billion in assets were classified as systemically important.
Then, in 2018, following a wave of complaints from smaller banks struggling to manage the costs of compliance with tougher regulations, former President Donald Trump, who described the Dodd-Frank Act as “a very negative”, enacted a partial cancellation. . The bill increased the SIFI threshold to $100 billion, then up to $250 billion 18 months later.
The changes were expected to free dozens of banks from rigorous annual stress tests, reducing the number of institutions under increased scrutiny to around 12. These liberated people look set to save millions in regulatory compliance costs. Less oversight should also give them more flexibility to grow their businesses.
That said, according to Section 401 of the bill, the Fed has the power to impose the same restrictions as the big banks on institutions with assets not exceeding $100 billion.
The reviews of Systemically Important Financial Institution (SIFI)
In the past, the process of determining whether a non-bank institution poses systemic risks has come under heavy criticism. MetLife Inc. won a lawsuit protesting its systemically important status in 2016, with the judge calling the government’s decision to label the life insurer “arbitrary and capricious”.
Skeptics of the SIFI label and Dodd-Frank regulations more generally have argued that rather than preventing companies from being “too big to fail”, the designation simply identifies those that are. Some argue that the increased regulatory burden has, in fact, exacerbated the risk of financial contagion: since the big banks are better able to bear the additional costs, they come out stronger and bigger, which ironically , leads to greater concentration in the financial sector.
President Trump’s 2018 Bill Crapoalso known as the Economic Growth, Regulatory Relief and Consumer Protection Act, was intended to eliminate this threat by freeing mid-sized lenders from stringent and costly regulatory scrutiny.
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