The Financial Stability Oversight Council (FSOC) said Friday it voted unanimously to issue for public comment new proposed interpretative guidance on its procedures for designating nonbank financial companies for Federal Reserve supervision and enhanced prudential standards.
The proposed guidance would replace the FSOC’s existing guidance, which was updated in 2019, and describes the procedural steps it would take in considering whether to designate a nonbank financial company for supervision.
The vote for new guidance comes less than a month after Rohit Chopra, director of the Consumer Financial Protection Bureau, said nonbanks and mortgage servicers may pose a systemic risk to the economy.
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"A major disruption or failure of a large mortgage servicer really gives me a nightmare," Chopra said March 28 during CBA Live 2023, a conference in Las Vegas hosted by the Consumer Bankers Association.
"No one really believes that there is no nonbank that could offer the same type of contagion or same type of systemic effect" as Silicon Valley Bank, he said, referring to the California bank that collapsed in March.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) authorizes the FSOC to designate a nonbank financial company for Federal Reserve supervision and prudential standards, if the council determines that material financial distress at the company, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the company, could pose a threat to U.S. financial stability.
Congress created the designation authority to fill a regulatory gap that became apparent during the financial crisis in 2007-09, when financial distress at large, complex, highly interconnected, highly leveraged, and inadequately regulated nonbank financial companies devastated the financial system.
In 2012, the FSOC issued a final rule and interpretive guidance describing its procedures and approach to nonbank financial company designations. It issued modifications to the 2012 interpretive guidance in 2019. The new proposed guidance would revise and update the 2019 guidance.
The FSOC also voted unanimously to issue for public comment a proposed analytic framework for financial stability risks.
The proposed framework is intended to provide greater transparency to the public about how FSOC identifies, assesses, and addresses potential risks to financial stability, regardless of whether the risk stems from activities or firms, the council said.
The proposals “are important to ensuring the council has a rigorous approach to identify, assess, and address risks to our financial system,” Secretary of the Treasury Janet L. Yellen said. “The council remains committed to public transparency regarding its work, and [the] proposals would make us better equipped to handle risks to the financial system, whether they come from activities or firms.”
The actions proposed today by the council would:
- Enhance its ability to address financial stability risks. The financial system continues to evolve, and past crises have shown the importance of being able to act decisively to address risks to financial stability before they destabilize the system. The new proposed guidance would help ensure that the council can use all of its 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 council performs its duties. For the first time, the council is proposing to issue a framework broadly explaining how it identifies, evaluates, and responds to potential risks to U.S. financial stability, whether they come from activities, individual firms, or otherwise. This framework outlines common vulnerabilities and transmission channels through which shocks can arise and propagate through the financial system. It also explains how the council considers the tools it will use to address these risks.
- Ensure a rigorous and transparent designation process. The proposed nonbank financial company designations guidance would continue to provide strong processes, including significant two-way engagement with companies under review. These processes would minimize administrative burdens on companies under review while providing ample opportunities to be heard and to understand the council’s analyses. The separate proposed analytic framework also explains how nonbank financial company designations fit into the council’s broader approach to financial stability risk monitoring and mitigation.
The two proposals will be available for a 60-day public comment period following their publication in the Federal Register.
