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Dallas Fed's Kaplan suggests stress testing for nonbank institutions

Regulators should implement stress tests and increased capital requirements for nonbank financial institutions just as they have for banks, Dallas Federal Reserve President Robert Kaplan told reporters May 18.

While Kaplan acknowledged that he has little influence over the body that studies systemic risk, the central bank regulator said the nonbank financial sector still deserves more scrutiny.

"I think we've been very well served in the banking regulation sector to do severe stress tests, rigorous stress tests, and very tough capital requirements. I would feel better if we also were ... applying vigorous tests to nonbank financials. That might be insurance companies and others," Kaplan said.

Kaplan's comments follow a debate on how to federally regulate systemic issues that may arise from nonbank financial institutions such as insurance companies, asset managers and government-sponsored enterprises Fannie Mae and Freddie Mac. The Financial Stability Oversight Council is working its way through a proposal that would change how nonbank financial institutions such as insurers and asset managers are designated and regulated as "too big to fail."

The new approach identifies risky activities that a company is involved in and requires the company's primary regulator to work with the company to resolve those issues. While a company could still be named a systemically important financial institution, the proposal elongates the process by adding additional steps and analysis.

Kaplan called for tailored versions of stress testing and capital requirements for those nonbank financial institutions in part because of the leveraged loans that sit on the balance sheets of nonbanks.

"I just think we need to be vigilant and watch the nonbank financial sector. That would be other agencies in the government, but I think we should have careful oversight there also, especially at this stage in the cycle," Kaplan said.