What is a 'Systemically Important Financial Institution – SIFI'

A systemically important financial institution is a firm that U.S. federal regulators determine would pose a serious risk to the economy in the event of its collapse; the label reflects the concept of "too big to fail" and imposes extra regulatory burdens.

BREAKING DOWN 'Systemically Important Financial Institution – SIFI'

The 2010 Dodd-Frank Act, a response to the financial crisis, established the Financial Stability Oversight Council (FSOC) and gave it the authority to label banks and other firms "systemically important financial institutions" (Sifi) – a designation the 2010 law also created. This label imposes extra regulatory requirements and increased scrutiny. These include strict oversight by the Federal Reserve, 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).

The law is designed to prevent a repeat of the 2008 financial crisis, which saw largely unregulated institutions such as American International Group Inc. (AIG) require large taxpayer-funded bailouts. Reasoning that financial contagion could originate in unexpected places, legislators created the FSOC to examine firms according to the risk posed by their size, financial position, business models and interconnectedness to other areas of the economy. 

In 2013 and 2014 the FSOC labeled as Sifis AIG; General Electric Capital Corp. Inc., the financial arm of General Electric Co. (GE); Prudential Financial Inc. (PRU) and MetLife Inc. (MET). MetLife won a lawsuit protesting the label in March 2016, which the government has appealed. GE Capital's designation was rescinded in June 2016, after the parent company announced it would divest most of its financial operations. AIG's designation was rescinded in September 2017. 

While the process of determining whether a non-bank institution poses systemic risks has come in for criticism – the judge who ruled in favor of MetLife called the government's decision to call the firm a Sifi "arbitrary and capricious" – the process for determining whether a traditional bank is a Sifi is more straightforward: banks with more than $50 billion in assets are systemically important. Smaller banks have pushed lawmakers to raise this threshold to $250, citing the costs they must bear to comply with enhanced regulation. In November 2017 senators from both parties said they had reached a deal to do so.

Critics of the Sifi label and of Dodd-Frank's regulations more generally have argued that rather than preventing firms from being "too big to fail," the designation merely identifies that 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.

RELATED TERMS
  1. Systemic Risk

    Systemic risk is the possibility that an event at the company ...
  2. Super Regional Bank

    A super regional bank is a mid-sized financial institutional ...
  3. Too Big To Fail

    "Too big to fail" is a term for a business that has become so ...
  4. Regulation F

    Regulation F is a regulation that sets limits on the amount of ...
  5. Capital Requirement

    A capital requirement is the standardized requirement for banks ...
  6. Private Label Credit Card

    A private label credit card is a store-branded credit card that ...
Related Articles
  1. Investing

    Too Big to Fail Gets Its Day in Court (MET, AIG)

    MetLife Inc. has sued the regulator in charge of the "too big to fail" designation, the Financial Stability Oversight Council.
  2. Investing

    Trump Vows to 'Dismantle' Dodd-Frank (MET, VFH)

    According to Trump's transition site, his administration will put an end to the law that includes restrictions on institutions that are "too big to fail."
  3. Investing

    Prudential May Lose 'Too Big to Fail' Label (PRU)

    Regulators are reconsidering whether insurance companies deserve the stigma.
  4. Investing

    The Biggest Risks of Investing in General Electric Stock

    Read about the biggest risks facing General Electric Company, an international conglomerate that is undergoing unprecedented restructuring.
  5. Investing

    Will the Next Financial Crisis Come From Europe? (DB, CS)

    Discover why the European financial system might be in trouble, why the European Central Bank may turn to bailouts, and why that is probably a mistake.
  6. Insights

    War Over "Too Big to Fail" Continues (RIF, CIT)

    Under new legislation, banks will no longer be designated as "too big to fail" just because they control assets of $50 billion or more.
  7. Managing Wealth

    Is the Fed Trying to Minimize the Next Stock Market Crash?

    Find out why the Federal Reserve wants to retroactively alter qualified financial contracts between big banks and investment firms.
  8. Insights

    Too Big to Fail Banks: Where Are They Now?

    In 2008, some financial companies were deemed "too big to fail." The government helped bail them out, and some of them have gone on to see big profits.
  9. Investing

    10 Years Later, Lessons from the Financial Crisis

    The Financial Crisis of 2008-09 brought the global economy and investors to its knees. Ten years on, we explore whether or not we learned any lessons.
  10. Insights

    A Brief History of U.S. Banking Regulation

    From the establishment of the First Bank of the United States to Dodd-Frank, American banking regulation has followed the path of a swinging pendulum.
RELATED FAQS
  1. What impact does government regulation have on the financial services sector?

    Learn about how the financial services industry is affected by government regulation, and the different types of regulations ... Read Answer >>
  2. How are investment banks regulated in the United States?

    Read about the extensive regulations placed on investment banks in the United States, starting with the Glass-Steagall Act ... Read Answer >>
  3. What trends affect profitability in financials?

    Explore the trends that most affect the financial services sector, including the role of central bank policy and challenges ... Read Answer >>
Trading Center