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Financial Services Law Insights and Observations

FSOC approves analytic framework for financial stability risks and guidance on nonbank financial company determinations

Agency Rule-Making & Guidance Federal Issues Fintech FSOC Federal Reserve Supervision Nonbank

Agency Rule-Making & Guidance

On November 3, the Financial Stability Oversight Council (FSOC) announced that it unanimously voted to issue the final versions of a new analytic framework regarding financial stability risks, in addition to updated interpretive guidance on the council’s nonbank designation guidance. The analytic framework indicates vulnerable points that commonly contribute to financial stability risks, and it explains how FSOC may address the risks, including interagency coordination, recommendations to regulators, or the designation of certain entities. The nonbank designation guidance establishes how the council determines whether a given nonbank should be under the Fed’s supervision and prudential standards under Section 113 of Dodd-Frank. In April, FSOC released the proposed analytic framework and the proposed nonbank designation guidance (as covered by InfoBytes here) and opened a comment period on the proposals.

FSOC adopted key changes in consideration of public comments on the proposed framework, including (i) clarifications to the interpretation of “threat to financial stability”; (ii) more examples of quantitative metrics considered in its analysis; (iii) expanded discussion of transmission channels; and (iv) additional emphasis on FSOC’s engagement with state and federal financial regulatory agencies regarding risk. Comments directed at the interpretive guidance were addressed, and some changes are reflected in the framework. Both CFPB Director Rohit Chopra and OCC Acting Comptroller Michael J. Hsu issued statements supporting the issuance of the interpretive guidance and the framework. Chopra commented that FSOC’s actions to evaluate whether any “shadow bank” meets the statutory threshold for enhanced oversight are essential in preventing potential threats to financial stability. Hsu also noted the significance of leveraging Dodd-Frank's tools for “monitoring and mitigating risks to U.S. financial stability.”

The analytic framework will be effective upon publication in the Federal Register, and the nonbank designations guidance will be effective 60 days after publication in the Federal Register.