The multiagency Financial Stability Oversight Council has unanimously voted to release proposed interpretive guidance regarding nonbank financial company systemically important financial institution (SIFI) designations. The proposal is available for public comment.

The new guidance would revise 2012 interpretive guidance and implement an “activities-based approach to identifying and addressing potential risks to financial stability.” It would also “enhance the analytical rigor and transparency” of the Council’s process for designating nonbank financial companies. “The proposal would make significant improvements to how the Council identifies, assesses, and responds to potential risks to U.S. financial stability,” Treasury Secretary Steven Mnuchin said in a statement. 

Under the proposed guidance, the Council would:

  • prioritize its efforts to identify, assess, and address potential risks to U.S. financial stability through an activities-based approach;
  • monitor diverse financial markets and market developments in consultation with relevant financial regulatory agencies;
  • leverage the expertise of existing regulators in pursuing the implementation of actions to address the risk;
  • perform a cost-benefit analysis before designating any nonbank financial company; 
  • consider the benefits and costs of a designation for the U.S. financial system and the relevant company;
  • designate a nonbank financial company only if the expected benefits justify the expected costs of the designation; and
  • assess the likelihood of a nonbank financial company’s material financial distress when evaluating the firm for a potential designation.

Before designating a nonbank financial company, the Council would “consider not only the impact of an identifiable risk, but also the likelihood that the risk will be realized.” Doing so, the proposal says, will ensure that it remains focused on the risks that are most likely to pose a threat to U.S. financial stability.

The FSOC’s new guidance would also help “create a more efficient and effective nonbank financial company designation process.” by condensing the current three-stage process into two stages, increasing engagement and transparency to firms and their regulators, and creating off-ramps that allow firms to understand and address potential risks to financial stability.

“Enhanced engagement will allow a company under review to provide the Council with relevant information, which will help to ensure that the Council is making decisions based on a diverse array of data and rigorous analysis,” the proposal says. “By making a company aware early in the review process of the potential risks the Council has identified, it seeks to give the company more information and tools to mitigate those risks prior to any designation, thereby providing a potential pre-designation ‘off-ramp.’ ”

Except in cases where new material risks arise over time, if a company adequately addresses the potential risks identified in writing by the Council at the time of the final determination and in subsequent reevaluations, the Council should generally be expected to rescind its determination. By clarifying the “off-ramp” to rescission and taking other steps to promote designated nonbank financial companies’ ability to reduce the risks they could pose to financial stability, the Council “seeks to both protect the U.S. financial system and reduce the regulatory burden on the companies.”

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