U.S. regulators Tuesday moved closer to mandating heightened oversight and tougher capital standards for more financial institutions, the latest step toward determining which companies pose the greatest risk to the financial system.

The Financial Stability Oversight Council, in a voice vote, proposed a new rule that would step up supervision for some nonbank financial companies.

The council would set a series of thresholds to determine if a company is a so-called systemically important financial institution: firms that have at least $50 billion in assets, and also cross one additional financial boundary, would come in for further evaluation.

In addition to the minimum asset requirement, companies trigger the second round of scrutiny if they have $30 billion in outstanding credit default swaps, $3.5 billion in derivative liabilities, $20 billion in outstanding loans borrowed and bonds issues, a 15 to 1 leverage ratio measured as assets to equity, or a 10% ratio of short-term debt to total assets.

The council in the first and second rounds measures nonbank financial companies using publicly available information. Nonbanks include hedge funds and private-equity firms, insurance companies, specialty lenders and broker-dealers.

If regulators are worried that a company--because of its portfolio, size and exposure to the rest of the system--would hurt the broader economy during a period of distress, the third stage of review begins.

Companies entering the third phase would be notified and receive yet more analysis using additional information provided by the firm.

At the end of stage three, the council with a two-thirds vote can designate an individual firm as systemically significant. Companies can contest the determination, which would spur a hearing and a second vote.

"This is important because we had a financial crisis caused by many things, but it was caused in part by the fact that we allowed a large amount of risk to build up in our financial system outside the scope of the classic set of safeguards that ... we impose on banks for example," Treasury Secretary Timothy Geithner said. Geithner is council chairman.

The Dodd-Frank financial-overhaul law, written in the aftermath of the 2008 financial crisis, automatically designates banks with $50 billion or more in assets as systemically important. But it gives regulators authority to decide which nonbank financial companies pose risks.

The rules are designed to avoid a repeat of Lehman Bros. collapse and American International Group Inc.'s (AIG) 2008 meltdown. The federal government bailed out AIG with $69.8 billion.

This is the council's second take on the rule for nonbanks. Industry groups said the first effort was too vague and created too much uncertainty. They are still studying the 68-page proposal.

"It's been pretty hard to get our arms around what FSOC is looking at. At least now the picture is forming a little more," said Tom Quaadman, vice president of the US Chamber's Center for Capital Markets.

FSOC is looking for public comment on the latest proposal. A final rule and designation of individual companies is likely months away.

Many companies are wary of the new rules, which could impose higher costs. The American Insurance Association, for example, has asked regulators to consider its industry "unique and fundamentally different than banking and other financial services."

The Federal Reserve will regulate the firms deemed systemically significant.

-By Jeffrey Sparshott, Dow Jones Newswires; 202-862-9291; jeffrey.sparshott@dowjones.com

Lehman (NYSE:LEH)
Historical Stock Chart
From Jun 2024 to Jul 2024 Click Here for more Lehman Charts.
Lehman (NYSE:LEH)
Historical Stock Chart
From Jul 2023 to Jul 2024 Click Here for more Lehman Charts.