Based on what Treasury Secretary Timothy Geithner said last week, it seems unlikely that mutual funds are going to be designated as systemically important financial institutions under Dodd-Frank.
In a question-and-answer session at the Investment Company Institute's annual general-membership meeting Wednesday, Paul Schott Stevens, president and chief executive of the ICI, asked the Treasury secretary whether he is considering a broad or narrow definition of “systemically important financial institution.”
In response, Mr. Geithner said that the debate shouldn't be about how broad or narrow the designation is.
“It should be about whether an institution can have the same inherent risk that comes with borrowing short so you can invest long-term in a size that matters,” he said.
Specifically, Mr. Geithner wants to make sure that institutions acting as investment banks through the use of leverage are regulated as such.
What he wants is very important to the mutual fund business.
Under the Dodd-Frank legislation, Congress created the Financial Stability Oversight Council, a group of financial regulators, to identify institutions that potentially could destabilize markets.
The FSOC is expected to designate which institutions — both banks and, importantly, non-banks — could pose substantial risk to the system by year-end.
Mr. Geithner is chairman of that council.
The mutual fund industry has been fighting to keep itself out of the FSOC's sights, claiming that the funds don't inherently pose the same kinds of liquidity challenges to the system that other institutions do.
At last week's gathering, Mr. Geithner seemed to assuage those fears. He said that establishing a broad designation could pose problems.
For example, the FSOC wants to make sure that it has a system to prevent a company from operating as a bank one day, then flipping its charter to become a thrift simply to avoid regulation.
“This is not something you can lock in and never change, because the market will adapt,” Mr. Geithner said.
E-mail Jessica Toonkel at [email protected].
