Regulators Worry Next Financial Crisis Won't Be Caused by Banks

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"Non-bank financial firms" sounds like a non sequitur. And according to federal regulators, the idea of letting these kinds of financial "gray area" firms -- also known as NBFFs -- continue to endanger the global economic system is fast becoming a non-starter.

Earlier this week, the government's Financial Stability Oversight Council, and members Treasury Secretary Jacob Lew and Federal Reserve Chairman Ben Bernanke, proposed tightening oversight of NBFFs. If passed, the regulations would name specific NBFFs as "systemically important" to the financial system, and subject them to heightened regulation. Specifically, the move would:
  • Place such firms under Federal Reserve oversight;
  • Require them to hold more capital in reserve against potential losses;
  • Require them to undergo financial stress tests such as those that already apply to America's biggest banks;
  • Obligate each regulated NBFF to prepare a "living will" explaining how it will safely wind itself down in the event it becomes insolvent, or otherwise too weak to go on living.
But none of this answers consumers' two main questions about the NBFFs:

What are these things, anyway?

And how would heightened regulation of them affect us?

NBFFs: What they are
Generally speaking, NBFFs include such entities as hedge funds (aka mutual funds for the rich) and private-equity funds (firms that invest in other firms... for the rich), and also more familiar businesses such as insurers and run-of-the-mill mutual funds.

Probably the prime example of an NBFF would be AIG, the insurance giant whose ill-considered decision to insure billions upon billions worth of junky subprime mortgage bonds brought it to the brink of extinction during the financial crisis and necessitated a taxpayer-funded $182 billion bailout.

Both AIG and fellow insurer Prudential (PRU), along with General Electric's (GE) GE Capital unit and MetLife (MET), are currently in the process of being labeled systemically important.

NBFFs: What they mean to you
"Systemically important" -- that sounds like a compliment, and certainly doesn't carry the baggage of the terms we've all become more familiar with these past few years: "too big to fail" and "too big to jail."

But don't expect AIG or Prudential, or any of the other NBFFs that get tagged with the label, to be sending the Council any thank-you notes for the honor.

Consumers may rue the day NBFFs are named too big to fail, too. In arguing against the Council's move, MetLife CEO Steve Kandarian warned that requiring systemically important NBFFs to hold higher "capital reserves" means they'll have less money to lend to consumers.

That means fewer loans, and it means more competition for the loan money that is out there -- which could increase the interest rates consumers have to pay to get access to it.

Kandarian also grumbled about how labeling his insurance company systemically important might hobble his ability to compete with smaller, less "important" insurers: Imposing higher capital requirements will "shift market share to smaller competitors who are not similarly regulated."

Shedding a tear for those poor, big NBFFs
Of course, from a consumer's perspective, our response to Kandarian's comment has to be: "So? What's the downside?" Because, to be perfectly honest, the CEO of MetLife appears to be saying that the only real "bad" effects of labeling too-big-to-fail NBFFs "systemically important" are that:
  • Too-big non-banks' costs will rise;
  • The prices they charge will rise;
  • As a consequence, consumers will shift their business to smaller institutions that can still charge us less anyway.
That sounds like a recipe for getting exactly what we want: smaller banks, which please consumers and reward investors better, and don't need $182 billion bailouts from the taxpayers every 10 years or so.

Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and General Electric and has the following options: Long January 2014 $25 Calls on American International Group.

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34 Comments

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Kuntheer

When you have piled 20 trillion in debt on top of people that can't get jobs, and loaded them down with school loans they cannot pay back, When social security is failing and claims they will only be able to pay 75% of what has been promised in 2035, when 46.6% of the population has a fair share of Zero, and we spend 146.6% of what we bring in, I have to ask one question about NBFFs, and I quote; “What difference at this point does it make?"

June 06 2013 at 12:37 PM Report abuse +2 rate up rate down Reply
tjcnopops2

Greedy crooks.

June 06 2013 at 12:10 PM Report abuse rate up rate down Reply
Diane

they forgot the most important change...don't allow Democrats to pressure them into making loans to unqualified people

June 06 2013 at 11:05 AM Report abuse rate up rate down Reply
crazychris379

if bill clinton had not ordered the banks to give the sub-prime loans none of the crap would have ever happened

June 06 2013 at 8:07 AM Report abuse +3 rate up rate down Reply
HIGHPOWER

The next big crisis is the one we are still in and have never recovered from. Obama's recovery has failed and Ben has been stimulating the economy with money we do not have. S.S is on a unsustainable path, Medi-Care is worse and inflation is right around the corner. And if you consider the trillion $ student loan debt that a large part of will become a liability due to the lack of jobs for the graduating students and you can see we have a disaster on our hands.

June 05 2013 at 11:23 PM Report abuse +3 rate up rate down Reply
Jawmore

Obama is the Kingpin here. He strangels the economy. George Bush did bail out AIG didn'tthe bailout work????? Obama bailed out companies also did that work? How can private sector learn from its mistakes if government keepss bailing them out????

June 05 2013 at 11:01 PM Report abuse +3 rate up rate down Reply
2 replies to Jawmore's comment
laugh

Unfortunately what the private sector learned is that they can do whatever they want and will be bailed out so why not gamble? It's a win-win for them - make a lot of money (win)/lose a lot of money and we'll bail you out (win again). And, NO PROSECUTIONS!

June 06 2013 at 7:26 AM Report abuse -1 rate up rate down Reply
setanta54s_back

TARP was paid back when taking into account the interest etc
and yes somestillare repaying BUT AGAIN with the interest from the others,it basically has been PAID BACK.
did we like this ?were we in agreement ? HELL NO.....BUT it was repaid-
contrast that with bam bams sweet heart grants and LOANS.
no comparison.

June 06 2013 at 3:09 PM Report abuse rate up rate down Reply
William

If it helps the Middle Class and hurts the Wall Street Gamblers and Robber Barons like Mitt Romney then we will have to elect a Majority of Democrats to get it done.

Republicans will never do anything good for the Middle Class, it's against their Religion to Regulate the Root all Evil, the Lustful Greed for Money.

June 05 2013 at 9:33 PM Report abuse -3 rate up rate down Reply
1 reply to William's comment
defelicep

William. You're totally clueless. You are definitely a LOW information voter. What has the democrats and Obama done for you lately? I'm curious.

June 06 2013 at 7:53 AM Report abuse +3 rate up rate down Reply
prinsovdarqnezz

It will be caused by 0WEbama and his band of incompetent buffoons.

June 05 2013 at 9:07 PM Report abuse +1 rate up rate down Reply
stevebakerguitar

It will be the government lobbiest, the banking & the IRS, Raping the american system government has set up for themselfs......

June 05 2013 at 8:43 PM Report abuse +4 rate up rate down Reply
1 reply to stevebakerguitar's comment
setanta54s_back

well,the slaves are pissed off and the slaves are armed.

June 05 2013 at 8:48 PM Report abuse +5 rate up rate down Reply
paddleman1928

the next financial crash will be the result of our not dealing with the mess the banks put us in-so it WILL be the banks that are the root cause of the next financial crisis.

June 05 2013 at 8:08 PM Report abuse +2 rate up rate down Reply