‘Nonbank designations’ would be based on four areas in proposed FSOC guidance

What is dubbed an “activities-based approach” to identifying and addressing potential risks to financial stability from nonbank financial companies is outlined in guidance proposed Wednesday by a group of federal financial services regulators.

The Financial Stability Oversight Council (FSOC) said the proposed guidance on the designations for nonbank financial companies as posing risks to financial stability would also enhance analytical rigor and transparency to its process for bestowing the designations. According to FSOC Chairman (and Treasury Secretary) Steven Mnuchin, the proposed guidance would make “significant improvements” to how FSOC settles on which firms will receive the designation.

“The result of significant collaboration among Council members, these changes will help ensure that the Council accomplishes its mission efficiently and effectively,” Mnuchin said in a statement.

The council, in a release, outlined four points in the proposed guidance for making the designations:

  • The council will consult with “relevant financial regulatory agencies” in monitoring financial markets and market developments. “In the event 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,” the council said.
  • The benefits and costs of a designation for the U.S. financial system and the relevant company would be considered in the designation, with the council making the decision to do so “only if the expected benefits justify the expected costs of the designation.”
  • The impact of an identifiable risk and the likelihood that the risk will be realized will be considered. “Doing so will ensure that the Council remains focused on those risks that are most likely to pose a threat to U.S. financial stability,” the group stated.
  • The current three-stage process for making the designations would be condensed into a two-stage procedure, “increasing engagement and transparency to firms and their regulators, and creating off-ramps that allow firms to understand and address potential risks to financial stability.”

The proposed guidance was issued for a 60-day comment period (which starts upon publication in the Federal Register).

Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies