Proposals would reset how nonbank financial firms are designated as risks to financial stability

Proposed revisions to a framework for identifying risk from nonbank financial companies to financial stability that would, for the first time, publicly outline how financial stability is identified and assessed and how risks are mitigated were issued Friday by federal financial regulators.

The proposed revisions to rules established by the Trump administration were issued by the Financial Stability Oversight Council (FSOC), the group of federal regulators chaired by Treasury Secretary Janet Yellen. The proposals were issued with comments due in 60 days.

According to the Treasury Department, the proposals would:

  • Enhance the FSOC’s ability to address financial stability risks by allowing the council to use all statutory authorities as appropriate to address risks to U.S. financial stability, regardless of the source of those risks.
  • Provide transparency to the public on how the FSOC performs its duties by, for the first time, broadly explaining how the council identifies, evaluates, and responds to potential risks to U.S. financial stability, whether they come from activities, individual firms, or otherwise.
  • Ensure a rigorous and transparent designation process by providing guidance for nonbank financial company designations guidance, including “significant two-way engagement with companies under review.” Treasury said that process would minimize administrative burdens on companies under review while providing ample opportunities to be heard and to understand the Council’s analyses. “Further, the separate proposed analytic framework explains how nonbank financial company designations fit into the Council’s broader approach to financial stability risk monitoring and mitigation,” the agency said.

In a statement, Treasury Secretary Janet Yellen said the existing guidance for use of nonbank designation authority has made it difficult for the FSOC to use its authority.

“The existing guidance – issued in 2019 – created inappropriate hurdles as part of the designation process,” she said. “These additional steps are not legally required by the Dodd-Frank Act. Nor are they useful or feasible. Some are based on a flawed view of how financial crises begin and the costs that they impose. It has been estimated that a designation process with these steps could take six years to complete. That is an unrealistic timeline that could prevent the Council from acting to address an emerging risk to financial stability before it’s too late.”

She called the proposal a significant step for ensuring FSOC’s nonbank designation process is “rigorous and transparent.” Both proposals, she said, are a “major step toward strengthening our safeguards for the U.S. financial system.”

FSOC Issues for Public Comment Proposed Analytic Framework for Financial Stability Risks and Proposed Guidance on Nonbank Financial Company Determinations