The Financial Stability Oversight Council voted unanimously Wednesday to issue for public comment proposed interpretative guidance on nonbank financial company designations.
The council said the proposed guidance would reinstitute a number of elements first introduced by its 2019 interpretive guidance and would add critical enhancements that reflect the Council’s current understanding of financial stability, underscoring the importance of economic growth and economic security.
“The Council has a vital mission – identifying and responding to potential threats to the stability of the financial system before they can translate into real economic harms,” Secretary of the Treasury Scott Bessent said. “Today’s proposed guidance would return the vouncil to prioritizing an activities-based approach where we focus first on risks that arise from specific activities and practices across markets, rather than single out individual firms.”
Per the council, the proposed interpretive guidance would:
Incorporate economic growth and economic security into the council’s analysis of risks to financial stability.
Economic growth provides the foundation for financial stability, and economic security, in turn, supports economic growth. The proposal describes how the council would consider impediments to economic growth and economic security when identifying potential risks to U.S. financial stability.
Prioritize identifying, assessing, and addressing risks through an activities-based approach.
Consistent with its statutory authorities, the council would prioritize its efforts to identify, assess, and address potential risks to U.S. financial stability through an activities-based approach. Under the proposal, the council would pursue entity-specific designations only if a potential risk or threat cannot be, or is not, adequately addressed through an activities-based approach. Prioritizing an activities-based approach would enhance the rigor of the council’s activities and facilitate the council’s efforts to consider impediments to economic growth and economic security when identifying potential risks to U.S. financial stability.
Enhance analytical rigor by committing to performing a cost-benefit analysis before a designation decision.
In evaluating a potential designation, the council would perform a cost-benefit analysis before designating a nonbank financial company, and make a designation only if the expected benefits justify the expected costs. The council would also assess the likelihood of the company’s material financial distress as part of its analysis of potential benefits and costs of a designation. These commitments would ensure that the Council’s actions are expected to provide a net benefit to U.S. financial stability and are consistent with thoughtful decision-making.
Provide a pre-designation “off-ramp” and promote greater transparency.
The council said the proposed guidance maintains strong procedural protections and includes a new pre-designation off-ramp. Under the guidance, the council would identify steps a nonbank financial company or financial regulators could take to address a potential threat to U.S. financial stability based on the council’s preliminary evaluation and allow time for the material risks to be addressed. Providing this opportunity to mitigate identified risks would enhance the transparency of the designation process and result in a more effective approach to addressing a potential threat to U.S. financial stability.
The council said that the proposed guidance will be available for a 45-day public comment period following its publication in the Federal Register.
