Responding to Changes to the Financial Supervision Playing Field
Financial market participants have recently witnessed the destructive potential of systemic risk -- now they must prepare for the government response. Under proposed legislation, certain financial institutions will for the first time become subject to Federal Reserve consolidated supervision, examination, and capital requirements. Other firms, currently operating under some form of financial regulatory regime, are likely to find themselves under closer scrutiny by the Federal Reserve or other regulators.
According to the US Treasury's Financial Regulatory Reform Plan, any financial firm whose combination of size, leverage, and interconnectedness could pose a threat to financial stability should be subject to robust consolidated supervision and regulation, regardless of whether the firm owns an insured depository institution. These yet to be identified, Tier 1 Financial Holding Companies (FHCs) will certainly include major insurance companies and large hedge funds. The list could also include other asset management firms and even traditional industrial companies with significant financial arms. If not deemed a Tier 1 FHC, financial firms are still likely to face the demands of a new Consumer Financial Protection Agency, and more empowered prudential and/or legal entity regulators.
Meeting these new, heightened regulatory expectations while remaining focused on sustaining a profitable business will be a key challenge for boards of directors and senior managers of major financial firms over the next few years.