financial stability oversight council better known as the fsoc the authority to designate firms as systemically important. while the statute is clear wilfinancial institutions will be designated, it is less clear about designating nonbank financial institutions. the financial -- the fsoc was tacked with promulgating rules to determine the criteria for nonbank financial institutions to be designated as systemically important, and the federal reserve is in the process of finalizing rules to supervise the entities that are des ig mated. there are many questions, again, about the effect the systemically significant designation will have on these nonbank firms. we have already seen with the largest banks systemic significance equates to market participants viewing these institutions as being too big to fail and expect the government to intervene in times of severe distress. the implied government guarantee also results in lower borrowing costs. it is less clear what the effect of this designation will have on nonbank entities. i know many of our witnesses on the second panel have serious concerns about the standards used not only for designating the firm but also for the supervision of nonbank firms once it is designated. t

was aig a nonbank financial institution? mr. gibson? thank you. >> yes. >> thank you. i tend to ask questions that you can answer yes or no. was aig into many different kinds of products, if you will, exotic products, credit swaps, derivatives? was aig into what we now refer to as exotic products, mr. gibson? >> well, with the caveat that the federal reserve was not the supervisor of aig, i'm pretty sure the answer to your question is yes. >> i understand that the federal reserve was not and i'm not going there. but i am going here. was aig the type of institution that fsoc would be designed to have an impact on? you want to pass mr. gibson -- i'm still with you. >> i would say that looking at the quantitative screens in stage one of the fsoc's process, aig would trip many or maybe all of those. >> of course it would. it was over $50 billion, wasn't it? >> yes. >> go on. elaborate. tell us why aig would come under the auspices of fsoc. >> under fsoc's rule, the category -- the characteristics that make up systemic importance, which have already been listed off -- some

industry, various industries when there was talk about the fed being able to designate nonbank financial institutions that it might be overly broad going forward. so a specific amendment was adopted into law. to define the area was engaged in financial activities. defined under existing law, section 4k of the bank holding act. but now the fed has gone beyond that. because here it describes specifically both predominantly engaged in financial acttivities means a company that derives 85% or more revenue or asset from activities, in section 102b, further provides that the board of governor will establish by regulation the requirements predetermining if a company is predominantly engaged in those sections. again, and end quotes. as defined in section a-6. it seems though it's laying out there pretty clearly in the statute so it would make sense that a list of activities for financial and that's not what is occurring here. that's why i make the position to try to make sure it would be limited to the area. part of the reproposal in april was a list of the activities considered to be financial activities as

industry, various industries when there was talk about the fed being able to designate nonbank financial institutions. so there was specific amendment adopted into the law. what it said was engaged in financial activities as defined under existing law section 4 k of the bank holding act. now the fed has gone beyond that because here in dodd frank it describes predominantly engage in financial activities is described as section 102 a 6 to mean a company that derives 1 or 2% from activities financial in nature. in section 102 b further provides that the board of governors shall establish by regulation if a company is predominantly engaged in those sections as described in action a-6. it seems as though it is laying out pretty clearly in the statute that financial activities are already defined as in a-6. so it makes sense that the list of activities for financial companies, bank holding companies would be to -- set a position that the fed is going beyond what is clearly set forth was part of the deliberation of congress in the amendment to try to make sure that it would be limitted to this area. >> so

perhaps you have an international nonbank financial institution and in their home country they have supervisory authority that's very clear. would the fed be likely that the fed would be designated or less likely? >> in the framework that the council lays out in its rules and guidance for stages two and three, the council does plan to take into account existing regulatory scrutiny. whether that scrutiny is domestic or foreign, whether it's at the consolidated level or at a legal entity level, the quality and extent of that regulation will all be factors that would lead into the council's ultimate determination about whether or not that firm poses a threat to financial stability. >> mr. gibson, you said earlier that you have the authority, the fed has the authority to tailor standards as appropriate to nonfinancial companies. now, isn't this unchartered territory for the fed? >> we have the authority to tailor the standards for nonbank financial companies. commercial companies would not be subject to the nonbank. so there are bank holding companies and financial holding companies that own insura

services and subcommittee on financial institutions and consumer credit looks at institutions deemed too big to fail. two of the eligibility requirements are that it must be a nonbank financial company and that 85% of its assets or revenue must be financial in nature. representative shelly moore capito chairs the subcommittee and this three-hour hearing. >> this hearing is called to order. it want to welcome everyone. this morning, the financial institutions and consumer credit subcommittee will examine the impact of being designated as systemically important financial institutions, specifically for nonbank financial entities. but i couldn't begin the hearing without talking about the most topical subject of the day or of the week. there's no doubt that this week's news of jpmorgan's trading losses has raised significant questions about the supervision of risk within an institution. the story is still unfolding. and although it appears that the, and seems to be that the firm had sufficient capital to absorb the significant loss, one of the questions that i would ask is would a less-capitalized institution survive a similar loss? are other financial

nonbank financial companies. questions from congressman al green, democrat of texas to michael gibson of the fred and lance auer of the treasury department. >> was aig a non-bank financial institution? mr. gibson? >> yes. >> thank you. i tend to ask questions that you can answer yes or no. and was aig into many different kinds of products, exotic products, if you will, credit default swaps, derivatives. was aig into exotic products? >> well, with the caveat that the federal reserve was not the supervisor of aig i'm sure the answer to your question was yes. >> i understand the federal reserve was not and i'm not going there. i am going here. was aig the type of institution that fsoc would be designed to have an impact on? you want to pass, mr. gibson? i'm still with you. >> i would say that looking at the quantitative screens in stage one aig would trip many or all of those. >> of course, it would. it was over $50 billion, wasn't it? >> yes. >> elaborate. tell us why aig would come under the auspices of fsoc. >> under the fsoc rule the category, the characteristics which make up systemic importance some of the most important ones are the size of the company and the interconnectednes

addresses key gaps in the framework for supervising and regulating systemically important nonbank financial institutions through a multi pronged approach that includes first the establish. of the financial stability oversight council which has the authority to the designate nonbank financial companies that could pose a threat to financial stability, second, a new framework for consolidated supervision and regulation of felon bank financial companies designated by the council, and third, improved tools for the resolution of failed nonbank financial companies. with respect to the first prong, the financial stability oversight council was created to coordinate efforts to identify and mitigate threats to u.s. financial stability across a range of institutions and markets. including by establishing a framework for designating nonbank financial companies whose failure could pose a threat to financial stability. on april 3rd, the council issued a final rule and interpretive