Belfast Telegraph

Thursday 17 April 2014

Non-banks 'financial world threat'

The Financial Stability Oversight Council did not name the non-bank financial firms

US regulators say a group of firms that are not banks should be deemed potential threats to the financial system that need stricter government oversight.

Big insurers American International Group, Prudential Financial and General Electric's finance arm GE Capital, said they were among the firms.

The near-collapse of AIG in 2008 helped trigger the financial crisis and it received a 182 billion-dollar (£119 billion) government bailout - the largest for any company in the financial crisis - that it has since repaid. Non-bank financial firms include insurers, hedge funds, mutual fund companies and private equity firms.

The Financial Stability Oversight Council did not name the non-bank financial firms because they have 30 days to notify the council that they are contesting the proposed designation. The council did not say how many firms it wants to designate as so big and inter-connected that their potential troubles could imperil the US financial system.

AIG did not say whether it intended to challenge the designation and Prudential said it was considering whether to request a hearing before the council to contest it. GE Capital spokesman Russell Wilkerson said the company was "reviewing the details".

Non-bank financial firms deemed "systemically important" would have to increase their cushion against losses, limit their use of borrowed money and submit to inspections by examiners.

The regulators' council, which includes US treasury secretary Jacob Lew and Federal Reserve chairman Ben Bernanke, took the action in a closed meeting. It was the most significant step yet by the council, which was created by the financial overhaul law to help prevent another financial meltdown.

The council will have to vote again to finalise each designation. If at least two-thirds of the 10 voting members agree, the council would formally put the designated firm under the central bank's supervision. Mr Lew, the council's chairman, would have to be among the two-thirds.

AIG sold guarantees on mortgage securities that forced it to pay billions of dollars after the sub-prime mortgage bubble burst in 2007. AIG was intertwined with the financial system through its sale of mortgage-related investments to big Wall Street banks, which themselves eventually received bailouts.

The government thrift agency had regulated AIG, but the company's mushrooming business involving complex investments called derivatives was run from London and elsewhere. That business fell through the regulatory cracks.

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