Almost everyone would agree that large banks like JPMorgan and Citigroup should be classified as Sifis — the melodious acronym for systemically important financial institutions, whose failure would produce widespread shocks to the financial system.
To reduce the chances of failure, regulators have imposed a broad array of extra requirements for capital, liquidity and risk controls on these Sifis.
The need for these requirements is less clear for two other categories of financial institutions currently labelled as Sifis: midsize regional banks and large insurance companies. Both types of institutions have been unsuccessful in getting their Sifi label dropped by regulators or legislators.
However, activist hedge funds have taken a more fruitful tack, pushing for structural changes to avoid the label at some midsize banks and large insurers.
In the Dodd-Frank Act of 2010 that sought to prevent systemic risks building in markets, Congress effectively applied the label to any banking institution with more than $50bn in assets.
But size is not a good indicator of potential adverse effects on the financial system. For instance, the dozen or so US bank holding companies with between $50bn and $100bn in assets are primarily regional institutions with low profiles in the global financial system.