470 REVIEW OF BANKING & FINANCIAL LAW VOL. 38 II. Designation and De-designation of Systemically Important Financial Institutions A. Introduction After the financial crisis of 2008, Congress responded with the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank).1 Dodd-Frank revamped the regulation of the financial sector in the United States in a number of ways.2 One of the most important changes was the creation of the Financial Stability Oversight Council (FSOC).3 FSOC is an interagency group made up of the heads of the U.S. financial regulators and is led by the Secretary of the Treasury (Treasury Secretary).4 FSOC’s purpose is to coordinate the regulators’ efforts in promoting the stability of the financial system.5 The exis- tence of FSOC itself has been controversial, but one of its most controversial powers has been its ability to designate nonbanking institutions as systemically important financial institutions (SIFIs) and subject them to more stringent prudential regulation under the oversight of the Board of Governors of the Federal Reserve (Fed).6 Proponents of this power argue that it is necessary in order to regulate the risks posed by “shadow banking,” which consists of banking activities carried out by entities that do not come under federal regulation.7 Opponents argue that this is unnecessary and over burdensome to the nonbank institutions that are labeled as SIFIs.8 1 Pub. L. No. 111-203, 124 Stat. 1376 (2010) (codified as amended in scat- tered sections of the U.S. Code); Jeremy C. Kress, The Last SIFI: The Unwise and Illegal Deregulation of Prudential Financial, 71 STAN. L. REV. ONLINE 171, 172 (2018). 2 George W. Madison et al., FSOC Designation Treasury Report: A Funda- mental Shift, DAILY BLOOMBERG BNA: DAILY REP. FOR EXECUTIVES (Jan. 18, 2018). 3 Id. 4 Id. (stating the composition of FSOC). 5 Id. 6 Id. (“[I]t is important to note that numerous critics—including many members of Congress—have pushed for a wholesale repeal of the FSOC designation authority.”). 7 Id. (discussing how the formation of FSOC was in part a response to the growing concern over shadow banking). 8 Kress, supra note 1, at 173 (discussing the view that SIFI designation creates unnecessary regulation at a high cost). 2018-2019 DEVELOPMENTS IN BANKING LAW 471 In 2013 and 2014, FSOC designated four companies as SIFIs: Prudential Financial, Inc. (Prudential); American International Group (AIG); General Electric Capital Corporation (GE Capital); MetLife, Inc. (MetLife).9 Since then all four have shed their SIFI labels.10 The de-designation of Prudential came last, and came after the Department of the Treasury (Treasury Department) indicated they would change the process for making SIFI designations.11 This article provides an overview of the SIFI designation and de-designation decisions and how the Treasury Department under the Trump Administration has changed the designation. Part B overviews the legal framework for SIFI designations put in place by Dodd-Frank after the financial crisis of 2008. Part C examines the initial process FSOC used to determine which, if any, nonbank financial institutions should be designated SIFIs. Part D describes FSOC’s initial designa- tions of AIG, GE Capital, MetLife, and Prudential. Part E discusses the initial de-designations of AIG and GE Capital. Part F looks at the changes in FSOC’s approach to SIFI designations during the Trump Administration, and the resulting de-designations of MetLife and Prudential. Part G summarizes some of the implications these changes will have on the future of SIFI designations. B. Relevant Dodd-Frank Provisions Under Dodd-Frank, Congress directed FSOC to designate a nonbank financial institution a SIFI if it determined that “financial distress at the U.S. nonbank financial company, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the U.S. nonbank financial company, could pose a threat to the financial stability of the United States.”12 For FSOC to designate a nonbank entity a SIFI, two-thirds of the members of FSOC—including the Treasury Secretary—must vote in favor of the designation.13 If 9 Id. (listing the firms that FSOC designated as SIFIs). 10 Id. at 174–75 (stating that all four companies have since had their SIFI designations removed). 11 Id. at 174 (“Trump selected nominees drawn from the financial sector and conservative legal circles, which had long criticized nonbank SIFI designations as burdensome and inequitable.”) 12 12 U.S.C. § 5323(a)(1) (2012). 13 Id. (“The Council, on a nondelegable basis and by a vote of not fewer than 2/3 of the voting members then serving, including an affirmative vote by the 472 REVIEW OF BANKING & FINANCIAL LAW VOL. 38 FSOC designates a nonbank entity as a SIFI then the nonbank entity will be placed under Fed regulation.14 Dodd-Frank requires the Fed to promulgate prudential standards for these entities that, “are more stringent than the standards and requirements applicable to nonbank financial companies and bank holding companies,” that are not super- vised by the Fed.15 Among others, these higher standards include larger capital and liquidity requirements, stricter leverage limits, and increased risk management.16 Entities that FSOC is considering desig- nating a SIFI can appeal the designation through a hearing with FSOC.17 If FSOC denies the appeal, then the entity can bring an action to prevent the designation in a United States district court.18 FSOC can also de-designate a nonbank SIFI and remove Fed supervision through a two-thirds vote, including the Treasury Secretary.19 C. FSOC’s Original Process After FSOC was established, it set out to determine how it would decide which, if any, nonbank entities should be designated SIFIs.20 FSOC developed a three-step process.21 The first step applied quantitative thresholds to nonbank entities in order to narrow the pool Chairperson, may determine that a U.S. nonbank financial company shall be supervised by the Board of Governors . .”); see Madison et al., supra note 2. 14 12 U.S.C. § 5365(a)(1) (2010) (“[T]the Board of Governors shall, on its own or pursuant to recommendations by the Council under section 5325 of this title, establish prudential standards for nonbank financial companies supervised by the Board of Governors and bank holding companies with total consolidated assets equal to or greater than $250,000,000,000 . .”). 15 Id. § 5365(a)(1)(A). 16 Id. § 5365(b)(1)(A). 17 Id. § 5323(e)(2) (“[T]he nonbank financial company may request, in writing, an opportunity for a written or oral hearing before the Council to contest the proposed determination.”). 18 Id. § 5323(h). 19 Id. § 5323(d)(2). 20 Kress, supra note 1, at 173 (“At least initially, the FSOC embraced its mission to identify nonbank SIFIs. The Council promulgated, through notice- and-comment rulemaking, formal procedures for evaluating a nonbank’s systemic importance.”). 21 Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies, 77 Fed. Reg. 21,637, 21,641–46 (Apr. 11, 2012) (to be codified at 12 C.F.R. pt. 1320) (describing the three-stage process for SIFI designations developed by FSOC). 2018-2019 DEVELOPMENTS IN BANKING LAW 473 of possible designees.22 If an entity surpassed the consolidated assets threshold, which was $50, billion and any one of the additional thresholds, then the entity would be considered under step two.23 There are six thresholds, including the consolidated assets threshold.24 If a firm moves on to stage two, FSOC will conduct a “robust analysis of the potential threat that each of those nonbank financial companies could pose to U.S. financial stability.”25 Firms are not notified if they are under review in stage two, and FSOC conducts the stage two review primarily through information obtained by the firm’s primary regulator and information that is publicly available.26 Evalua- tion of this information will vary from company to company and from industry to industry, but it will use six basic characteristics as a guide: “(i) size, (ii) interconnectedness; (iii) substitutability, (iv) leverage, (v) liquidity risk and maturity mismatch, and (vi) existing regulatory scru- tiny.”27 Size, interconnectedness, and substitutability are used to assess the firm’s potential “distress to the broader economy.”28 Leverage, liquidity risk and maturity mismatch, and existing regulatory scrutiny are used to assess to how likely it is a firm will experience financial distress.29 After stage two, if FSOC believes it may be necessary to designate a nonbank entity as a SIFI, then the nonbank entity moves to 22 Id. at 21641–42 (explaining that the purpose of stage-one is to “narrow the universe” of possible designees by applying “uniform quantitative thresholds”). 23 Id. at 21642 (stating that if an entity exceeds the requisite thresholds in stage-one then they will move on to consideration under stage-two); Financial Stability Oversight Council: Nonbank Designations—FAQs, U.S. DEP’T TREASURY, https://www.treasury.gov/initiatives/fsoc/designations/ Pages/ nonbank-faq.aspx [https://perma.cc/4HNA-NKP7] (last visited May 30, 2019). 24 77 Fed. Reg. at 21,643 (identifying the other five thresholds as (i) $30 billion in gross notional credit default swaps outstanding; (ii) $3.5 billion of derivative liabilities; (iii) $20 billion in total debt outstanding; (iv) fifteen-to- one leverage ratio of total consolidated assets to total equity; and (v) ten percent short-term debt ratio of total debt outstanding with a maturity of less than twelve months to total consolidated assets). 25 Id. at 21645. 26 Id. (describing the information that is used to conduct the review process in stage two).