VIEWPOINT: Two Sets of Standards, One Big Muddle for SIFIs

Article excerpt

Byline: Karen Shaw Petrou

There will be two turning points this month for the new regulatory framework for systemically important financial institutions. First, global regulators will reveal criteria to define global SIFIs - the biggest of the big. And the U.S. will take yet another stab at our SIFI standards, issuing the third proposal on how to tell a SIFI from a run-of-the-mill big nonbank financial company.

As these standards take shape, there's growing danger that their sum total will be flat-out silly: global SIFIs judged by just how humongous they are while U.S. SIFI standards slap around bank holding companies with as little as $50 billion in assets and even small foreign-bank operations here if the parent back home crosses the $50 billion threshold.

The stakes here are very high. The global SIFI standards will cost covered firms first a punitive capital surcharge and then additional up-the-ante requirements. U.S. SIFI standards are set by Title I of the Dodd-Frank Act, meaning they are set in law and soon to come. The statute mandates an array of high-impact SIFI standards to be set by final rule no later than Jan. 21, 2012.

To be sure, these SIFI standards result from the manifest lapses that led to the financial crisis. The new rules seem to make sense in the abstract, but piled together, all of them create a crushing burden of complex, untested and cross-cutting rules with unknown implications that may well have unintended consequences. Thus, regulators should carefully calibrate the SIFI standards, with the U.S. taking particular care to require them only of institutions that genuinely pose real risk to the financial system, not just those that cross the arbitrary SIFI thresholds stipulated by Dodd-Frank and sure not to be used by any other nation or by global regulators.

The global rules for SIFIs are in the works at the Basel Committee on Banking Supervision and the Financial Stability Board, the parent organization not just for the Basel Committee, but also for international securities and insurance regulators. SIFI standards have emerged as a top priority, in part because global regulators feared that, if they didn't finalize them now, the sense of panic that sparked the current regulatory round would fade and, with it, the chance for any global accord on cross-border SIFIs.

As a result, global SIFI standards are set to be released later this month and then finalized in time for the G-20 summit in November. Along the way, the stability board will finally agree not just on what to dictate for SIFIs, but also on who they are so that the standards are - it hopes - uniformly applied in every jurisdiction in which a global SIFI sets up shop.

The first add-on global standard for global SIFIs will be a capital surcharge. Initially, regulators were divided on this, with some instead favoring a tax to reimburse home-country citizens for any future SIFI bailouts. The tax issue has been left to national jurisdiction and the focus - along with at least a preliminary consensus - is on capital.

The global SIFI surcharge here will be some form of higher requirement atop the Basel III capital standards - 3% is the working assumption. …