Activities Are Not Enough!: Why Nonbank SIFI Designations Are Essential to Prevent Systemic Risk

Forthcoming, Systemic Risk in the Financial Sector: Ten Years After the Great Crash (Douglas W. Arner, Emilios Avgouleas, Danny Busch, & Steven L. Schwarcz, eds., 2019)

Boston College Law School Legal Studies Research Paper No. 492

19 Pages Posted: 25 Oct 2018 Last revised: 15 Nov 2018

See all articles by Jeremy C. Kress

Jeremy C. Kress

University of Michigan, Stephen M. Ross School of Business

Patricia A. McCoy

Boston College Law School

Daniel Schwarcz

University of Minnesota Law School

Date Written: October 10, 2018

Abstract

Since the financial crisis, policymakers have developed two different approaches to systemic risk arising from nonbank financial firms such as insurance companies and investment banks. The first, dubbed an entity-based approach, empowers a public entity like the Financial Stability Oversight Council or Financial Stability Board to designate individual nonbank systemically important financial institutions for enhanced regulation and supervision. The second, known as an activities-based approach, seeks to regulate financial activities that can produce systemic risk.

During the first several years after the crisis, governments and multi-national standard setters embraced both entity- and activities-based approaches to the problem of nonbank systemic risk. More recently, however, an emerging view has begun to dominate financial regulatory circles: that regulators should focus principally on an activities-based, rather than an entity-based, approach.

This book chapter challenges this emerging consensus. It argues that, in the absence of entity-based designations, a purely activities-based approach will expose the financial system to the same risks that the world experienced in 2008. This chapter, which is substantially based on a more detailed law review article by the authors, focuses on the international dimensions of nonbank systemic risk regulation and the shift by multi-national standard-setters to an activities-based approach.

Keywords: Systemic Risk, Financial Stability, Financial Stability Oversight Council, Financial Stability Board, Nonbank Financial Companies, Entity-Based Regulation, Activities-Based Regulation

Suggested Citation

Kress, Jeremy C. and McCoy, Patricia Ann and Schwarcz, Daniel B., Activities Are Not Enough!: Why Nonbank SIFI Designations Are Essential to Prevent Systemic Risk (October 10, 2018). Forthcoming, Systemic Risk in the Financial Sector: Ten Years After the Great Crash (Douglas W. Arner, Emilios Avgouleas, Danny Busch, & Steven L. Schwarcz, eds., 2019); Boston College Law School Legal Studies Research Paper No. 492. Available at SSRN: https://ssrn.com/abstract=3264164 or http://dx.doi.org/10.2139/ssrn.3264164

Jeremy C. Kress (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Patricia Ann McCoy

Boston College Law School ( email )

885 Centre Street
Newton, MA 02459-1163
United States

Daniel B. Schwarcz

University of Minnesota Law School ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://www.law.umn.edu/profiles/daniel-schwarcz

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