FSOC Issues Request for Comment on Guidance for Non-Bank Financial Companies, Financial Stability Risks

At its last meeting in April, the Financial Stability Oversight Council (FSOC) proposed new rules to assess financial stability risks and amend how non-bank institutions are designated as systemically important. Secretary of the Treasury, Janet Yellen stated “today’s proposals are important to ensuring the Council has a rigorous approach to identify, assess, and address risks to our financial system,” and added that the proposals would “make us better equipped to handle risks to the financial system, whether they come from activities or firms.”

The first proposal would create an analytic framework for financial stability risks, specifically “how the Council identifies, assesses, and addresses potential risks to financial stability, regardless of whether the risk stems from activities or firms.” Under the proposal the FSOC would consider a broad range of asset classes (debt markets, short term funding, digital assets, derivatives, among others), certain settlement activities and central counterparties, financial entities (including asset managers, investment companies, mortgage originators, broker-dealers, among others), as well as new and evolving financial products and practices. The FSOC would also examine transmission channels and system vulnerabilities, whether they arise from certain firms or activities. When addressing potential risks, the framework would allow the FSOC to consider interagency coordination and information sharing, recommendations to agencies or Congress, non-bank designation (see the “interpretive guidance” proposal below), financial market utility designation, and other financial activities that could likely become systemically important.

The second proposal includes “interpretative guidance” on procedures for designating non-bank financial companies which would fall under Federal Reserve supervision and enhanced prudential standards. Dodd-Frank authorizes FSOC to designate a nonbank financial company if the Council determines that “material financial distress at the company, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the company, could pose a threat to U.S. financial stability.” The proposal focuses on the procedures the FSOC would use to review a nonbank financial company for potential designation. Under the proposed guidance, FSOC would “generally expect to follow a two-stage process of evaluation and analysis when determining whether a nonbank financial company should be subject to Federal Reserve supervision and prudential standards.”

  • Step One: A preliminary analysis, based on quantitative and qualitative information available to the Council primarily through public and regulatory sources.
  • Step Two: If selected for additional review, the entity will receive notice that it is being considered for a proposed designation and will be subject to a more in-depth evaluation.

The comment period for the proposals will be open for 60 days following their publication in the Federal Register.

Click here to read the FSOC press release on the proposed new rules covering non-bank financial intermediaries and financial stability risks.
Click here to read a fact sheet covering the analytic framework for financial stability risk assessment.
Click here to read a fact sheet on the Non-Bank Financial Company Designation proposal.