Lubin Business Review: Cutting-Edge Research For Today’s Business Professionals
Book Abstract 1
ISSUE AND IMPORTANCE
MAIN FINDINGS
The issue studied here is whether and to what extent, nonbanks (shadow
The 1,000-page Dodd-Frank Act, with its 16 titles covering the major
banks) should be regulated. Traditional banking, commencing in the Great
institutions of finance, made significant inroads in the regulation of the
Depression, has been subject to a panoply of regulations emanating mainly
major types of non-bank financial processes such as hedge funds, mutual
from the Federal Reserve Board and at least ten other government
funds, repos, securitization, and insurance companies. It created the
agencies. Nonbank financial intermediaries, such as hedge funds, had
Financial Stability Oversight Council (FSOC), which was given the power to
previously escaped from onerous regulatory oversight. Currently, nonbank
identify risks to the financial stability of the U.S. that could arise in times of
entities account for over $80 trillion, or one-quarter, of the total global
material financial distress, promote market discipline, and respond to the
financial assets thus begging the issue presented; particularly after the
emerging threats thereto. For those nonbank financial entities that are
2007 et seq. global financial crisis.
large enough to cause serious disruption to the overall economy if stressed, the Council may designate them as systemically important financial institutions (SIFIs) resulting in significant oversight and the compelled maintenance of enhanced prudential standards.
PRACTICAL IMPLICATIONS The result of a FSOC designation as a SIFI has been extremely controversial. The designation of General Electric Capital Corporation as a SIFI caused the company to sell off significant financial lending and other assets to remove the designation. MetLife instituted litigation which to-date has been successful in a court finding that negated such designation. The Financial Choice Act, passed by the House of Representatives, reflects the growing concern of regulatory overreach. I forecast further Congressional responses.
*ROY GIRASA J.D., Ph.D. is a Professor of Law at the Lubin School of Business. He is the author of some 130 articles and four books namely: Cyberlaw: National and International Perspectives, published by Prentice-Hall; Corporate Governance and Finance Law, Laws and Regulations in Global Financial Markets, and Shadow Banking: The Rise, Risks, and Rewards of Shadow Banking, all published by Palgrave Macmillan. He has taught graduate courses at the University of Shanghai, in Stralsund, Germany, and has lectured throughout India and other countries. He formerly was a trial attorney and counsel to NYS Senator, Olga Mendez.
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