By Mark A. Hofmann, Crain News Service
WASHINGTON (Feb. 5, 2013) — The U.S. financial system remains vulnerable to financial institutions that can be deemed "too interconnected to fail," according to a report presented to Congress.
In its quarterly report to lawmakers, the Office of the Special Inspector for the Troubled Asset Relief Program (SIGTARP), said on Jan. 30 that regulators were "ill-prepared" to protect taxpayers when the financial crisis of 2008 struck because "they failed to appreciate the interconnected nature of our financial system." The institutions weren't only "too big to fail" but highly interconnected, said the report. "If one were to fail, the house of cards would collapse," the report said.
According to SIGTARP, these institutions continue to form the foundation of the national economy and "continue to be dangerously interconnected."
"In fact, they have only gotten bigger in the past four years," said SIGTARP.
The report noted that the Dodd-Frank Wall Street Reform and Consumer Protection Act gives regulators authority to subject financial institutions deemed "systemically important" to heightened regulation.
"However, it remains unclear how regulators will use that authority, and to what degree," said the report. "The determination of which non-bank institutions are considered systemic also remains unclear. In addition, companies previously described as systemic, such as (American International Group Inc.), have gone without financial regulation for years."
"Treasury and regulators must provide incentives to the largest, most interconnected institutions to minimize both their complexity and their interconnectedness," the report said.
"Treasury and regulators should send clear signals to the financial industry about levels of complexity and interconnectedness that will not be accepted," according to SIGTARP. "Treasury and regulators must set the standards through increased capital and liquidity requirements to absorb losses, as well as tighter margin standards. Treasury and regulators should limit risk through constraints on leverage. And companies, in turn, must do their part."
The full report is available here.
This report appeared in Business Insurance magazine, a Chicago-based sister publication of Tire Business.