The Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) recently proposed methodologies for the identification of systemically important financial institutions that are not banks or insurers (NBNI). The principle underlying the proposal is to identify those entities whose failure would cause “significant disruption to the global financial system and economic activity across jurisdictions” because of their size, complexity, and systemic interconnectedness.
The proposal identifies three channels where failure of NBNIs are most likely to transmit their distress to the financial markets and thereby threaten financial stability:
- Exposure of creditors, counterparties, investors, and other market participants to the NBNI
- Liquidation of assets trigger a decline in asset prices that significantly disrupts trading or causes significant losses or funding problems for similar firms
- Inability or unwillingness to provide a critical function or service to market participants or clients where there are no ready substitutes in the market.
The proposal acknowledges the difficulty in identifying basic factors to apply to all NBNIs given the wide range of entities involved. However, the proposal identifies basic factors to identify systemic threats, including size, interconnectedness, substitutability, complexity, and global activities. Recognizing the difficulty in getting appropriate and consistent data across jurisdictions, the proposal gives supervisory judgment a larger role for NBNIs than in the bank or insurance context, with national authorities playing a key role in the process.
In addition to the general factors above, the proposal contains specific thresholds for three types of entities, chosen based on their large size in the non-bank space and the global impact of past failures of the entities.
- Finance companies with $100 billion in “balance sheet assets”
- Broker-dealers with $100 billion in “balance sheet assets”
- Investment funds with $100 billion in assets under management or hedge funds with $400-600 billion in gross notional exposures.
With respect to investment funds, the proposal requests comment on whether the size should be evaluated by looking at individual funds, asset managers themselves, a fund family, or asset managers and their funds collectively.
Comments are due on the proposal by April 7, 2014.