The Financial Stability Oversight Council is seeking public comment on proposed guidance regarding nonbank financial company designations.
Under this guidance, FSOC would perform a cost-benefit analysis before designating any nonbank financial company. In this process it would look at the benefits and costs of a designation for the U.S. financial system and the company. A nonbank financial company would only be designated if the expected benefits justify the expected costs of the designation.
Further, FSOC would take an activities-based approach to identify, assess, and address potential risks to U.S. financial stability. If a potential risk to U.S. financial stability is identified, the council would leverage the expertise of existing regulators in pursuing the implementation of actions to address the risk.
“Today’s proposal would make significant improvements to how the council identifies, assesses, and responds to potential risks to U.S. financial stability,” Treasury Secretary Steven Mnuchin said. “The result of significant collaboration among Council members, these changes will help ensure that the Council accomplishes its mission efficiently and effectively.”
Also, FSOC would assess the likelihood of a nonbank financial company’s material financial distress when evaluating the firm for a potential designation. In addition, the proposed guidance would establish a more efficient and effective nonbank financial company designation process. The proposed guidance would condense the current three-stage process into two stages.
The proposal is open for a 60-day public comment period after publication in the Federal Register.
The Investment Company Institute supports the new FSOC proposal.
“We welcome the changes that the Council is proposing in the process for addressing any potential systemic risks among nonbank financial companies. The FSOC has firmly committed to addressing risks through an activities-based approach and would only consider designating entities as SIFIs as a last resort—as we have long urged. If the FSOC did decide to pursue designation, the proposed changes would make that process more transparent, accountable, and rigorous,” ICI President and CEO Paul Schott Stevens said.
Stevens said the changes would enhance the analytical rigor and transparency of the designation process.
“Importantly, the proposed changes emphasize the crucial role of primary regulators, who are best suited to work with the company under review to mitigate potential risks before imposing the costly burden of SIFI designation,” Stevens added. “This action aligns with legislation introduced by Senators Rounds, Jones, Tillis, and Sinema that would codify improvements to the FSOC process. We look forward to commenting on these developments before the Senate Banking Committee next week.”
Stevens will testify before the Senate Banking Committee next week at a hearing on the subject.