The U.S. Department of the Treasury is recommending ways to improve the Financial Stability Oversight Council’s (FSOC) process for designating nonbank financial companies, such as asset managers, as systemically important financial institutions (SIFIs).
“Our recommendations include enhancing FSOC’s analytic process, implementing cost-benefit analysis, and increasing transparency,” Treasury Secretary Steven Mnuchin said. The release is in response to the April 21, 2017, Presidential Memorandum that directed Treasury to evaluate FSOC’s designation processes.
The report suggests that FSOC should implement a three-step process for addressing potential risks to financial stability: review potential risks to financial stability from activities and products, work with relevant regulators to address those risks, and consider company-specific designations only after consultation with relevant regulators.
Further, Treasury said FSOC’s designation processes should leverage the expertise of regulatory agencies, promote market discipline, maintain a level playing field among firms, tailor regulations to minimize burdens, and ensure designation analyses are rigorous, clear, and transparent.
Specifically, Treasury said FSOC should assess the likelihood of a firm’s material financial distress as part of analysis, designate a company only if the expected cost benefits to financial stability outweigh the costs of designation, enhance its communication with nonbank financial companies under review, provide a clear “off-ramp” to designated nonbank financial companies, and adopt a more robust and transparent process for its annual reevaluations.
Several industry groups commended the report, including the American Council of Life Insurers (ACLI).
“While ACLI is reviewing the entirety of the report, we are strongly encouraged by the emphasis on improved engagement and transparency in the designation process. No life insurer should be designated as systemically important. The report rightfully recognized that,” ACLI President and CEO Dirk Kempthorne said.
The Investment Company Institute also offered its support for the Treasury’s recommendations.
“The report correctly concludes that SIFI designation is a ‘blunt instrument’ and justly prioritizes an activities-based or industrywide focus on addressing any potential systemic risks in nonbank financial institutions,” ICI President and CEO Paul Schott Stevens said.
Since 2013, registered funds and their managers have worked under the threat that they could be subjected to onerous regulations that banks are accustomed to.
“Today’s report is an important step in the right direction, calling for changes that will enhance the FSOC’s analytical rigor and transparency, paving the way for a more constructive—and appropriate—engagement between nonbank financial institutions and the council,” Stevens said. “Importantly,” he concludes, “the report elevates the 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.”