The Financial Stability Oversight Council can improve the process for monitoring risk to the financial system by looking at specific activities or industrywide practices, rather than focusing on identifying non-banks as systemically important financial institutions, the Treasury Department said in a report released Friday.
The report on the FSOC process, and recommended changes, were ordered in April by President Donald Trump as part of a wholesale review of financial regulations.
The report calls the SIFI designation "a blunt instrument," and recommends FSOC members provide a clear "off-ramp" for any non-bank firms with the designation, plus a more "robust" process for annual re-evaluations. A SIFI designation, it said, should only come as a last resort.
It also calls for more cost-benefit analysis of FSOC activities. The council is chaired by Treasury Secretary Steven Mnuchin, with members from other financial regulators. Those regulators, the report said, should be the primary defense against financial risks. Mr. Mnuchin said in a statement the changes will improve the FSOC's analytic process and increase transparency.
Paul Schott Stevens, president and CEO of the Investment Company Institute, welcomed the recommendations, which he said would remove the threat of asset management firms being subjected to bank-like regulations, but he added permanent reforms will require legislation.