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Regulation

FSOC proposes changes to non-bank SIFI designations

Jerome Powell, chairman of the U.S. Federal Reserve, left, speaks as Steven Mnuchin, U.S. Treasury secretary, listens during a Financial Stability Oversight Council (FSOC) meeting at the U.S. Treasury in Washington, D.C.,

The Financial Stability Oversight Council is proposing changes to how non-banks can be designated systemically important financial institutions.

The council voted unanimously Wednesday on proposed interpretive guidance that would make it less likely that a non-bank is given a SIFI designation. The proposal calls for emphasizing an activities-based approach — addressing potential risks and threats to U.S. financial stability on a systemwide basis rather than focusing on individual non-banks — and allows primary financial regulatory agencies to take the lead in addressing those risks.

"This approach is consistent with the council's priorities of identifying and addressing potential risks and emerging threats on a systemwide basis, in order to reduce the potential for competitive market distortions that could arise from entity-specific determinations, and allow primary financial regulatory agencies to address identified potential risks," the guidance says.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, non-banks that regulators concluded would threaten the financial system if they collapsed were given a SIFI designation. The SIFI label brings tough oversight by the Federal Reserve and a series of difficult supervisory exercises, such as stress tests and the submission of strategies for how the companies can be safely wound down in a bankruptcy.

The proposal would also establish a cost-benefit analysis requirement before any non-bank is given a SIFI designation.

Four non-banks — Metlife, General Electric Capital, American International Group and Prudential Financial — were given the SIFI label after Dodd-Frank went into effect, but none has one today. Most recently, the council rescinded Prudential's designation in October. In April 2017, President Donald Trump directed Treasury Secretary Steven T. Mnuchin to launch a "thorough review" of the FSOC's designation methods, with a particular focus on making its approach more transparent and giving firms a better chance of getting out.

Investment Company Institute President and CEO Paul Schott Stevens applauded the proposal. "(The) action is an important step, calling for changes that would enhance the FSOC's analytical rigor and transparency, paving the way for a more constructive — and appropriate — engagement between non-bank financial institutions and the council," he said in a statement. "Importantly, the proposed changes emphasize the crucial 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."

But Dennis Kelleher, president and CEO of Better Markets, a non-profit advocacy group for financial markets, said in a statement that the council's actions "irresponsibly ignore the lessons of the 2008 crash, which was ignited in and spread by systemically significant non-banks in the shadow banking system. Following the de-designation of the SIFI non-banks, "these actions are just another nail in the coffin of FSOC, which is basically putting an 'out-of-business' sign on its door," he added.

The proposed interpretive guidance will be open for a 60-day public comment period after it is published in the Federal Register.