Is AIG a Potential Risk to the Global Financial System?

In a statement Tuesday, American International Group (NYSE:AIG) said a government panel has notified the insurer that it is under consideration to be labeled a potential risk to the financial system, a classification that would bring increased federal oversight.

The Financial Stability Oversight Council, led by Treasury Secretary Timothy Geithner, is responsible for assessing which banks and non-bank institutions should be subject to increased Federal Reserve supervision, which includes stress tests, higher capital levels, and more stringent liquidity requirements. Measures taken by the council aim at preventing further government bailouts by ensuring that a firm’s failure would not jeopardize the American financial system.

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In a statement made on September 28 the Treasure Department said, “Members voted to advance certain non-bank financial companies to the third stage of the council’s review,” the Treasury Department said in a statement on September 28. “The council will undertake further analysis of these companies before voting on any proposed designations.”

As a result of the council’s assessment, AIG, in which the United States government remains a top shareholder, could be deemed a “systemically important financial institution” under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The council was originally created under the Dodd-Frank law to evaluate leverage and derivative liabilities of firms with more than $50 billion in assets. Bank holding companies with more than $50 billion in assets, like Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS), Wells Fargo (NYSE:WFC), and Citigroup (NYSE:C), are automatically subject to increased government regulation.

If the Financial Stability Oversight Council finds AIG to be potential risk, the company has 30 days in which to challenge the notice.

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