Report: FSOC should designate non-banks as ‘systemically important’ by starting with risk associated with activities, products

Risks to financial stability by nonbank financial companies should be evaluated through a process that starts with reviewing the activities and products of individual organizations, the Treasury recommends to President Donald Trump.

In a report to the president on the Financial Stability Oversight Council’s (FSOC) “designations” of nonbank financial companies as “systemically important financial institutions” (SIFIs), Treasury also recommends that FSOC conduct a cost-benefit review as part of an analysis of the “likelihoods of a firm’s material financial distress.”

According to the recommendations, the non-bank financial company should be designated as a SIFI only if “the expected benefits to financial stability outweigh the costs of designation.”

Additionally, the report recommends that FSOC should enhance its communication with nonbank financial companies under review and their primary financial regulators,” and; that the council should provide a clear “off-ramp” to designated nonbank financial companies and adopt a more robust and transparent process for its annual re-evaluations.

The FSOC is made up of the heads of the federal financial institution regulators; the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC); Federal Housing Finance Agency (FHFA); and the secretary of the Treasury. The group was created by the 2011 Dodd-Frank Financial Reform and Consumer Protection Act (Dodd-Frank) to “bring together the financial regulatory community to identify and respond to emerging threats to financial stability.”

The report additionally outlines five goals that FSOC should pursue in its designations process:

  • Leverage the expertise of primary financial regulatory agencies (to tap the “expertise and knowledge regarding the company and the markets in which the company operates” and so that an existing relationship between regulator and company “can efficiently and effectively address potential risks”);
  • Promote market discipline (by eliminating any expectation of a government rescue for the company);
  • Maintain a level playing field among firms (by not taking actions that either raise costs for a company, or raises expectations of a government rescue);
  • Appropriately tailor regulations to minimize burdens (to ensure that any “supervision or enhanced prudential standards imposed on a company should be appropriately tailored for the risks the company may pose, to avoid unnecessary burdens”); and
  • Ensure the Council’s designation analyses are rigorous, clear, and transparent (by providing the public with “sufficient information to understand the Council’s concerns regarding risks to financial stability, while protecting sensitive, confidential information submitted by companies and regulators to the Council.”)

Memorandum: Financial Stability Oversight Council Designations

Fact sheet/summary of recommendations