Janet Yellen
The Financial Stability Oversight Council finalized new guidance easing its ability to designate nonbank financial institutions as systemically important and place them under Federal Reserve supervision.
The new guidance, originally proposed in April, replaces 2019 guidance issued under the Trump administration, which Treasury Secretary Janet L. Yellen said is a process that needed changes.
The update "eliminates several prerequisites to designation in place under the current guidance that were not contemplated by the Dodd-Frank Act and that are based on a flawed view of how financial risks develop and spread," Yellen said at the Nov. 3 FSOC meeting.
Under the new process, FSOC will determine if a nonbank is a systemically important financial institution, or SIFI, through "a preliminary analysis, based on quantitative and qualitative information," and give the firm a chance to respond, according to a Treasury Department press release. If FSOC moves forward with their process, the firm would discuss the matter with their primary regulator and FSOC. An official designation requires a two-thirds vote from FSOC's 10 voting members.
But the Investment Company Institute and Managed Funds Association both expressed criticism of the new guidance.
"It is disappointing that FSOC has decided to adopt a flawed risk assessment framework and a designation guidance that backtracks from current standards," ICI President and CEO Eric Pan said in an emailed statement. "The move away from an activities-based approach and toward making it easier to label a company as 'systemically important' lacks justification."
MFA President and CEO Bryan Corbett said in a Nov. 3 statement: "FSOC's adoption of the flawed guidance will hurt financial stability. SIFI designation for alternative asset managers is inappropriate — as they do not carry the same risks as banks — and will do nothing to curtail systemic risk in the market."
Alternatively, Steven M. Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets, said the organization fully supports the changes.
"Many large nonbank financial institutions are failing to adequately prepare for the rapid decarbonization of the U.S. economy and intensification of physical and transition climate impacts," Rothstein said in a Nov. 3 statement. "This new guidance will allow for an easier designation of these institutions as systemically important, ensuring that the Federal Reserve can supervise and enforce safety measures before they can cause widespread and long-lasting harm to our financial system."
FSOC also issued a new framework for identifying, assessing and addressing risks to financial stability in an effort to increase transparency.
