Regulating Nonbanks: A Plan for SIFI Lite
Georgetown Law Journal, Vol. 105, 2017
54 Pages Posted: 2 Mar 2016 Last revised: 4 Jul 2017
Date Written: March 1, 2016
This Article examines a relatively recent addition to the institutional architecture of financial regulation in the United States: the Financial Stability Oversight Council (FSOC). In particular, it draws attention to a flaw in the design of the Council’s power to designate nonbank financial companies as “systemically important financial institutions,” commonly known as “SIFIs.” Specifically, the Article argues that the binary nature of the designation power has underappreciated costs, which make the SIFI designation system less effective and efficient than it otherwise could be.
The Article makes both positive and normative claims. First, it draws attention to the ways in which a binary designation power incentivizes certain financial institution behavior, such as litigation and restructuring. A binary designation power can also influence regulatory behavior by creating an opportunity for politicized decision making. The Article highlights the social and economic costs of these behaviors, which include the potential for underinclusive supervisory scope, increased information asymmetries, and distorted business decisions. Such costs can undermine the SIFI stability agenda as well as financial institution efficiency. Second, in teasing out the normative implications of that cost analysis, the Article argues for a more marginal — nuanced — apparatus for regulating nonbank financial institutions. In doing so, the Article also probes the broader question of whether the entity-based paradigm is the most effective regulatory strategy for appraising and addressing systemic risk in the nonbank arena. Ultimately, by exploring how SIFI policy should be revised to reflect these normative insights, the Article develops a broader theory about post-crisis regulatory design — that regulators have undervalued supervision, and the information it produces, as a tool for systemic risk management outside the traditional banking system.
Keywords: financial regulation, FSOC, financial stability, systemic risk, SIFI
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