FSOC issues new framework for risks, updates nonbank guidance

The Financial Stability Oversight Council (FSOC) approved a new analytic framework for financial stability risks and updated guidance on its nonbank financial company determinations process.

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The council’s new Analytic Framework for Financial Stability Risk Identification, Assessment, and Response explains how FSOC monitors, assesses, and responds to potential risks to financial stability. The framework details the vulnerabilities and transmission channels that most commonly contribute to risks to financial stability and explains the range of authorities the council may use to address any particular risk.

Also, the updated guidance for Nonbank Financial Company Determinations outlines the council’s procedures for considering whether to designate a nonbank financial company for Federal Reserve supervision and prudential standards. The Nonbank Designations Guidance provides a transparent process and opportunities for engagement with both a nonbank financial company under review and its existing regulators.

“Financial stability is a public good, and we need a robust structure to monitor and address the build-up of risks that could threaten the financial system,” Secretary of the Treasury Janet Yellen said. “Congress created FSOC after the global financial crisis to identify and respond to risks to financial stability, and our actions today go to the heart of fulfilling that critical mission. Establishing an analytic framework and a durable process for the Council’s use of its designation authority will strengthen our ability to mitigate the risks of financial crises that can devastate businesses and households.”

Overall, the Analytic Framework and the Nonbank Designations Guidance create effective approaches for the Council to use any of its authorities to identify and respond to potential risks to U.S. financial stability.

The framework provides new insight into how the council will monitor the financial system for potential financial stability risks, evaluate identified risks, and act to mitigate risks. It will also, for the first time, explain how the council considers risks irrespective of their source, and how it addresses risks using the full range of its authorities.

In addition, the Nonbank Designations Guidance maintains the council’s existing processes for companies that it considers for potential designation. Under the guidance, there is a multi-step process of significant engagement with a company under review and its primary financial regulator, enabling a company to act to mitigate risks identified by the council.

The council issued a Proposed Analytic Framework and Proposed Nonbank Designations Guidance for public comment in April 2023 and provided for a 90-day comment period. These documents approved by FSOC reflect feedback from the public.

The Analytic Framework will be effective upon publication in the Federal Register, and the Nonbank Designations Guidance will be effective 60 days after publication in the Federal Register.