Mutual funds not in 'too big to fail' category

NOV 24, 2013
To prevent a repeat of the financial crisis, the federal government is continuing the process of identifying financial firms that are deemed “too big to fail.” Firms so identified are subject to extra scrutiny by regulators and may have to meet higher capital requirements and other financial metrics that smaller companies in their industry won't have to meet, conceivably putting these larger firms at a competitive disadvantage. The Financial Stability Oversight Council, which was created under the Dodd-Frank financial reform law, ultimately will decide which institutions will be designated as systemically important. To help them in the process, Dodd-Frank also authorized the creation of the Office of Financial Research, which is providing data and analysis to the FSOC.

MUTUAL FUNDS TARGETED

Although several large banks have already been identified as too big to fail, along with insurance giants American International Group Inc. and Prudential Financial Inc., the Office of Financial Research is now considering broadening the scope of the designation to include large mutual fund companies such as BlackRock Inc. and Fidelity Investments. These asset managers are pushing back, arguing that they don't present the type of risk that the FSOC was designed to address. Yes, they are big and are responsible for investing huge amounts of assets on which Americans depend to help reach their financial goals. But there are many big firms in the United States, and many of them are important players in the economy. Should all of them be labeled too big to fail? Size alone should not and cannot be the single determining factor as to whether a company is considered systemically important. Perhaps the strongest argument that firms such as BlackRock and Fidelity can make is that unlike many of the large institutions already identified as too big too fail, these firms didn't need a bailout during the financial crisis. In other words, history is on their side. If in the final analysis, if the Office of Financial Research recommends that these asset managers be deemed too big to fail, cooler heads at the FSOC should prevail and the recommendation should be rejected.

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