What Is a Systemically Important Financial Institution (SIFI)?
A systemically important financial institution (SIFI) is a bank, insurance, or other financial institution (FI) that U.S. federal regulators determine would pose a serious risk to the economy if it were to collapse. A SIFI is viewed as “too big to fail” and imposed with extra regulatory burdens to prevent it from going under.
- A systemically important financial institution (SIFI) is a company that U.S. regulators determine would pose a serious risk to the economy if it were to collapse.
- This label imposes extra regulatory requirements and increased scrutiny, including strict oversight by the Federal Reserve, higher capital requirements, periodic stress tests, and the need to produce "living wills."
- Former President Donald Trump signed a bill to pare back parts of the Dodd-Frank Act, raising the threshold that determines which companies qualify as a SIFI.
- The changes were expected to help many mid-sized financial institutions save millions in regulatory compliance costs and give them greater flexibility to expand their businesses.
Understanding Systemically Important Financial Institution (SIFI)
The Great Recession was mainly blamed on financial companies taking on too much risk. Regulators recognized that closer scrutiny in the future would be paramount to prevent a repeat, noting that many companies in this industry are deeply ingrained in the functionality of the economy or, as they put it: too big, complex, and interconnected to fail.
The 2010 Dodd-Frank Act established the Financial Stability Oversight Council (FSOC), giving it the authority to label banks and other FIs SIFIs. The goal was to prevent a repeat of the 2008 financial crisis, which saw largely unregulated institutions such as American International Group Inc. require large taxpayer-funded bailouts. Reasoning that financial contagion could originate in unexpected places, legislators created the FSOC to examine companies according to the risk posed by their size, financial position, business models, and interconnectedness to other areas of the economy.
The SIFI label imposes extra regulatory requirements and increased scrutiny. These include strict oversight by the Federal Reserve (Fed), higher capital requirements, periodic stress tests, and the need to produce "living wills"—plans to wind up operations without triggering a financial crisis or requiring a bailout.
Financial institutions (FIs) displaying signs of stress under testing are required to postpone share repurchases, curtail dividend plans and, if necessary, raise additional capital.
Systemically Important Financial Institution (SIFI) Requirements
The process for determining which companies are SIFIs has undergone some changes in recent years. Previously, FIs with more than $50 billion in assets were labeled as systemically important.
Then, in 2018, following a wave of complaints from smaller banks struggling to handle the costs of complying with enhanced regulation, Former President Donald Trump, who described the Dodd-Frank Act as “a very negative force,” signed into law a partial rollback. The bill increased the SIFI threshold to $100 billion and then all the way up to $250 billion 18 months later.
The changes were expected to liberate dozens of banks from rigorous annual stress tests, bringing the number of institutions facing heightened scrutiny down to about 12. Those freed look set to save millions in regulatory compliance costs. Less oversight should also give them greater flexibility to expand their businesses.
That said, according to section 401 of the bill, the Fed does have the power to place the same restrictions that larger banks face on institutions with assets as low as $100 billion.
Criticisms of Systemically Important Financial Institution (SIFI)
In the past, the process of determining whether a non-bank institution poses systemic risks has come under heavy criticism. MetLife Inc. won a lawsuit protesting its systemically important status in 2016, with the judge calling the government's decision to label the life insurer as such "arbitrary and capricious.”
Skeptics of the SIFI label and of Dodd-Frank's regulations more generally have argued that rather than preventing companies from being "too big to fail," the designation merely identifies the ones that are. Some argue that the increased regulatory burden has, in fact, exacerbated the risk of financial contagion: since larger banks are better able to shoulder the extra costs, they come out stronger—and bigger—as a result, ironically giving rise to greater concentration in the financial sector.
President Trump's 2018 Crapo bill, otherwise known as the Economic Growth, Regulatory Relief, and Consumer Protection Act, was intended to eliminate this threat by freeing mid-sized lenders from strict and costly regulatory scrutiny.