On June 3, 2013, the Financial Stability Oversight Council (FSOC) approved “proposed determinations” of an initial set of nonbank financial companies to be designated as systemically important financial institutions (SIFI). Under FSOC rules, companies subject to a proposed determination will receive an explanation of FSOC’s decision and may, within 30 days, request a nonpublic evidentiary hearing. This hearing is to occur within 30 days of the company’s request. Within 60 days of the hearing, FSOC must make a final determination as to whether a company is a SIFI. Under the Dodd-Frank Act, a company determined to be a SIFI may challenge the designation in U.S. District Court.

FIO Focus issue 13 provides an overview of the three-stage process for determining if nonbanks, including insurance companies, are SIFIs.

Regulatory Requirements for Nonbank SIFIs

The Dodd-Frank Act provides that nonbank financial companies designated as SIFIs will be subject to prudential oversight by the Federal Reserve. This oversight will include additional governance standards as well as reporting and capital requirements. SIFIs will also need to file a resolution plan with the Federal Deposit Insurance Corporation (FDIC).

While the Federal Reserve has issued a rule regarding stress testing requirements for nonbank SIFIs, it has not yet published final rules for enhanced prudential standards or early remediation requirements. A proposed rule was published in January 2012 that provides that the Federal Reserve would be able to tailor the application of “enhanced standards to different companies on an individual basis or by category of business. The following are some of the requirements that nonbank SIFIs may be subject to under the proposed rule.

Reporting Requirements

  • The submission of an annual capital plan to the Federal Reserve that shows the company’s ability to maintain sufficient capital despite potential risks and/or financial stress.
  • The production of comprehensive cash flow projections of assets, liabilities and off-balance sheet exposures over the short and long term.
  • The development of a contingency funding plan outlining a process for managing a company’s financial resources during a liquidity event and identifying a liquidity stress management team.
  • The submission of quarterly reports to the Federal Reserve about a SIFI’s risk-based capital and leverage ratios.

Capital Requirements

  • Minimum risk-based and leverage capital requirements calculated as if the company was a bank holding company.
  • Restrictions on single-counterparty exposures and investments of capital.
  • The holding of sufficient capital and use of total risk-based capital ratios.
  • Establishment of a liquidity buffer of highly liquid unencumbered assets sufficient to support the company for 30 days during a liquidity event.
  • A debt to equity ratio that does not exceed fifteen to one.


  • An annual review by the Board of Directors of the company’s risk tolerance.
  • Review, approval and oversight of liquidity risk management strategies and processes by the Board of Directors.
  • Establishment of a risk management committee to manage liquidity risk and review liquidity costs and risks for new lines of business or products.
  • A review function, independent of management functions, to evaluate liquidity risk management.
  • The establishment of a risk management committee responsible for enterprise-wide risk management practices if the nonbank SIFI is a publicly traded company.


  • A system to monitor assets pledged as collateral and unencumbered assets available to be pledged as collateral.
  • Procedures to monitor intraday liquidity positions.

Stress Testing

The Federal Reserve has issued a final rule for stress tests for nonbanks designated as SIFIs. SIFIs will be subject to annual stress tests by the Federal Reserve and will be required to conduct semi-annual internal stress tests. The purpose of the stress tests is to determine if a SIFI has sufficient capital both across the holding company and in individual entities. The stress tests are to be designed to incorporate baseline, adverse and severely adverse conditions. The Federal Reserve may provide specific scenarios for the testing, but companies are expected to tailor the internal stress tests to their business model and lines of business. Nonbank SIFIs must develop policies and procedures for stress tests including processes for validating results and updating the stress testing methodologies. The results of internal stress tests are to be provided to the Federal Reserve.

The Dodd-Frank Act provides that the Federal Reserve should publish a summary of the results of stress tests. However, because of concerns that results of the baseline and adverse condition tests could be perceived as earnings guidance and/or may lead to the early disclosure of business plans, the Federal Reserve plans to release only information about the results of the severely adverse stress tests.

Resolution Plan

Nonbank SIFIs will have to file a resolution plan or “living will.” The resolution plan is to provide a range of options and specific alternatives for rapidly unwinding the company in the case of bankruptcy. The resolution plans are to include governance, organizational structure, management information systems, and strategic plans and must be updated periodically.