WASHINGTON (Reuters) - The new financial risk council has divided non-bank financial institutions that could be subject to additional oversight into four categories, including hedge funds and insurers.
The Dodd-Frank law gives the government the authority to seize a large, failing financial institution so that it can be liquidated without causing too much chaos in the financial markets, such as occurred when Lehman Brothers went bankrupt in September of 2008.
Under this system, the new Financial Stability Oversight Council is supposed to designate financial firms other than banks that are "predominantly engaged in financial activities" and could pose a threat to financial markets.
These firms will be overseen by the Federal Reserve.
Federal Deposit Insurance Corp Chairman Sheila Bair said the risk council's staff has divided the non-bank financial world into four sectors as it studies which firms could pose a risk to the financial system.
In testimony prepared for a Senate Banking Committee hearing on Thursday and obtained by Reuters, Bair said the four sectors are:
-- the hedge fund, private equity firm and asset management industries;
-- the insurance industry;
-- specialty lenders; and
-- broker-dealers and futures commission merchants.
"The non-bank financial sector encompasses a multitude of financial activities and business models, and potential systemic risks vary significantly across the sector," Bair says in her testimony.
Big financial firms, like BlackRock Inc, that fall outside the banking world, have been making their pitch to the Fed on why they should not be considered for supervision.
They fear Fed style supervision will prove costly because banks have more regulatory rules to meet, including capital standards.
Also at Thursday's hearing, Securities and Exchange Commission Chairman Mary Schapiro plans to tell lawmakers her agency will soon announce the selection of a director to head up a new whistleblower program.
The whistleblower program was inserted into Dodd-Frank after the SEC failed to detect Bernard Madoff's massive Ponzi scheme, despite receiving numerous tips and complaints, including a credible and detailed one from former investment company executive Harry Markopolos.
The law also empowers the agency to compensate whistleblowers whose tips lead to monetary sanctions above $1 million.
FDIC's Bair also will tell the committee that a provision in Dodd-Frank prohibiting regulators from using the work of credit rating agencies -- such as Moody's Corp, McGraw-Hill Cos' Standard & Poor's, and Fimalac SA's Fitch Ratings -- in overseeing banks is proving difficult to carry out.
Regulators have made no secret they believe this provision goes too far. Bair says banking agencies have yet to find an adequate replacement for the work of credit raters when assessing bank capital, despite seeking suggestions in August when a proposed rule was released.
"The comments we received, for the most part, lacked substantive suggestions on how to approach this question," she says in her testimony.
Reporting by Dave Clarke, Sarah N. Lynch, and Mark Felsenthal; Editing by Tim Dobbyn