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 GE Capital's designation was rescinded in June 2016, after the parent company announced it would divest most of its financial operations. AIG's designation was rescinded in September 2017.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.