New systemic-risk tags are better late than never. American International Group, GE Capital and Prudential Financial are among the first nonbank firms to be deemed systemically important financial institutions, or Sifis, by the Financial Stability Oversight Council. These are no-brainers for the moniker. Trouble is, five years on, watchdogs are still bogged down in the last crisis rather than looking out for the next one.
All three financial giants on Monday said they had been flagged for the stiffer oversight bestowed on SIFIs, but A.I.G. and GE Capital seem especially deserving. Uncle Sam had to swoop in and help both during the financial crisis, with A.I.G. receiving a $182 billion lifeline and GE Capital a federal guarantee for its new debt.
It’s taken a long time, however, to reach this point. Regulators need to be careful that they justify the Sifi label, which can force companies to spend a lot more on compliance. But former Treasury Secretary Timothy Geithner identified A.I.G. and GE Capital three years ago as the type of nonbanks deserving special regulatory attention. In the interim, the two companies have largely fixed their weaknesses, diminishing the danger they once posed to the financial system.
That doesn’t make the regulators’ efforts pointless. Excessive risk-taking is a hard habit to break. But the watchdogs have gotten bogged down in the financial crisis. They still need to reform money market mutual funds and implement Volcker Rule limits on banks’ proprietary trading. And the fate of Fannie Mae and Freddie Mac remains up in the air.
Meanwhile, financial markets are evolving quickly. The proliferation of exchange-traded funds, the rise of giant asset managers like BlackRock and the decline of banks’ role in making markets is changing how money flows through the system. Moreover, a rash of cyber attacks on financial institutions has made security a pressing issue. Regulators need to make sure a focus on the past doesn’t blind them to new dangers lurking just ahead.
Agnes T. Crane is a columnist at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
