Identifying and Regulating Systemically Important Financial Institutions: The Risks of Under and Over Identification and Regulation

Certain financial institutions are so central to the American financial system that their failure could cause traumatic damage, both to financial markets and to the larger economy. These institutions are often referred to as “systemically important financial institutions” or SIFIs. Among its numerous provisions, the Dodd-Frank Act, the comprehensive reform legislation signed into law during the summer of 2010, requires financial regulators belonging to the Financial Stability Oversight Committee (FSOC) [1] to designate those financial institutions that are systemically important.[2] Such SIFIs are to be supervised more closely and potentially required to operate with greater safety margins, such as higher levels of capital, and to face further limitations on their activities.

Dodd-Frank designated all commercial banking groups with $50 billion or more in assets as SIFIs, but left the decision about which non-bank financial institutions should receive that designation up to the FSOC, with advice from the Federal Reserve Board (Fed).

This policy brief is intended to assist the Fed and the FSOC with this difficult task. We pay particular attention to the risks of including too many or too few institutions as SIFIs, as well as touching on the related risks of over- or under-regulating SIFIs. As with so many issues related to financial regulation, the key is to strike the right balance, allowing financial institutions to respond as they see fit to market forces and customer demands, except where there is a true public interest in constraining that response.


1. Members of the FSOC include the Treasury Secretary (chair), the Chairman of the Federal Reserve System, the Comptroller of the Currency, the Chairman of the Federal Deposit Insurance Corporation, the Chairman of the Securities and Exchange Commission, the Chairman of the Commodities Futures Trading Commission, the Director of the Bureau of Consumer Financial Protection, the Director of the Federal Finance Housing Agency, the Chairman of the National Credit Union Administration Board, a member with insurance expertise designated by the President and confirmed by the Senate, and various non-voting members (such as a representative of state bank regulators).

2. There is some ambiguity in the legislation as to whether all systemically important financial institutions must be designated as such, or only those where the FSOC feels it is necessary to do so. Section 113(a)(1) uses the term “may” whereas Section 112(a)(12)(H) indicates a requirement.