• News from Capitol Hill: House Proposal to Impose Risk-Based Assessments
  • December 21, 2009
  • Law Firm: Patton Boggs LLP - Washington Office
  • On Thursday, November 19, 2009, the House Financial Services Committee completed its markup of the Financial Stability Improvement Act (FSIA). The FSIA establishes the Financial Services Oversight Committee (FSOC), which would serve as a systemic risk regulator, monitoring and imposing tougher controls upon systemically significant bank and nonbank financial institutions that could pose a systemic risk to the U.S. economy in the event of a failure. The legislation would also give resolution authority to the Federal Deposit Insurance Corporation (FDIC) to wind down failing firms, with the cost of the wind-down paid for by industry peers rather than taxpayer funds. The membership of the FSOC would consist of officials from federal banking regulators which, together with the Federal Reserve, would be charged with identifying systemically significant firms and imposing higher capital level requirements and other more stringent operating standards.

    One of the accepted amendments related to the Fund was a proposal by Rep. Gutierrez (D-IL) designed to provide for the orderly dissolution of a failed financial company that poses a systemic risk to financial markets.

    The Fund’s purpose is to facilitate and provide for the “orderly and complete dissolution of any failed financial company or companies that pose a systemic threat to the financial markets or economy” and “ensure that any taxpayer funds utilized to facilitate such liquidations are fully repaid from assessments levied on financial companies.”

    As set forth in the amendment, the Fund is created from assessments levied on financial companies with assets greater than $10 billion. Rep. Gutierrez supported such a threshold so that “small and community banks will not be put on the line for the consequences of large firms taking big risks.” Additionally, the assessments will be paid by financial companies in amounts proportional to their assessed risk, as determined by the FDIC and the newly-created Financial Services Oversight Council.

    During the debate of the proposal, Rep. Sherman (D-CA) proposed to increase the threshold amount from $10 billion to $50 billion, in order to clearly exclude small and community banks from the Fund provisions. The result of such an amendment is that large financial institutions with more than $50 billion in assets will be subject to paying an assessed fee into the Fund. According to Federal Reserve data, impacted institutions would include the 33 largest U.S. chartered commercial banks as of June 30, 2009, including JP Morgan Chase, Bank of America, Citibank and Wells Fargo. (http://www.federalreserve.gov/releases/lbr/current/default.htm)

    In order to capture hedge funds within the scope of the legislation, however, Rep. Sherman added an additional clause which would require hedge funds (as defined by the FDIC and Securities and Exchange Commission) to contribute to the Fund should the hedge fund have more than $10 billion in assets under management. Hedge funds that hold more than $10 billion include, but are not limited to, Bridgewater Associates, DE Shaw, Soros Fund Management and Paulson & Co. (http://www.bloomberg.com/apps/news?pid=20601103&sid=auoJn1UIRV2Q&refer=us)

    Ultimately, the Gutierrez amendment, as amended by Rep. Sherman, was approved by the House Financial Services Committee by a 41-28 vote.

    The result of this legislative proposal is that hedge funds with more than $10 billion in assets and other financial companies with more than $50 billion in assets would be required to make contributions to the Fund to finance the orderly dissolution of failed financial companies that pose a systemic risk to financial markets.

    On December 2, the House Financial Services Committee approved this legislation by a vote of 31-27, which will bring it to the House floor for a full debate and vote.