A new analytic framework approved by the Financial Stability Oversight Council (FSOC) seeks to provide further clarity into how the U.S. financial system is monitored for potential financial stability risks.

The framework, issued Friday, “explains how the council considers risks irrespective of their source and how the council addresses risks using the full range of its authorities,” said the Treasury Department in a press release. FSOC, which is led by Treasury Secretary Janet Yellen, first proposed the framework in April.

The framework will take effect 60 days after publication in the Federal Register.

The framework describes FSOC’s process for identifying, assessing, and addressing threats to financial stability, which the council describes as “events or conditions that could substantially impair the financial system’s ability to support economic activity.” In October 2021, FSOC notably declared climate change as an emerging and increasing threat to financial stability.

Once a potential threat has been identified, FSOC assesses the vulnerabilities and transmission channels involved. The framework sets out eight areas of vulnerability assessment—leverage, liquidity risk and maturity mismatch, interconnections, operational risks, complexity or opacity, inadequate risk management, concentration, and destabilizing activities—and four channels most likely to facilitate transmission of the negative effects of a risk to financial stability: exposures, asset liquidation, critical function or service, and contagion.

FSOC then addresses potential threats through interagency coordination and information sharing, recommendations to government agencies or Congress, specific designations, or other authorities available to the council.

“This framework will help the public better understand how the council goes about its work and how it draws on its various statutory tools to respond to risks,” said Yellen in remarks at FSOC’s meeting. “For the first time, it provides a clear explanation of how the council monitors, evaluates, and responds to potential risks to financial stability, regardless of whether they come from activities, individual firms, or other sources.”

Also Friday, FSOC issued updated guidance on its nonbank financial company determination process.