FSOC Issues for Public Comment Proposed Analytic Framework for Financial Stability Risks and Proposed Guidance on Nonbank Financial Company Determinations

The U.S. Department of the Treasury, USDT, has published a [press statement](https://home.treasury.gov/news/press-releases/jy1432) to announce two (upcoming) consultations in connection with the maintenance of financial stability in the U.S., both launched by the USDT’s Financial Stability Oversight Council:
The first consultation, which was meanwhile published in the Federal Register, seeks feedback on a proposed analytical framework for the identification, assessment, and response of the Council to potential risks to U.S. financial stability. The framework would thereby describe
- the activities the Council would perform to identify potential threats such as the monitoring of central counterparties and their activities, the monitoring of the debt and securities markets, the monitoring of „financial entities, including banking organizations, broker-dealers, asset managers, investment companies, insurance companies“;
- the risk assessment process which would primarily include the identification and assessment of vulnerabilities such as increased leverage, liquidity risk and maturity mismatch, interconnections of financial market participants, high concentrations among market players, etc. and the potential „transmission“ of such vulnerabilities to other financial market players and the financial market as a whole; and
- the measures the Council may take to address these risks and vulnerabilities, including the coordination and sharing of information with other regulatory agencies, the issuance of recommendations to such agencies or even to the U.S. congress as regards the taking of further action, or the designation of certain companies as systemically relevant which would authorize the Council to adopt supervisory measures (e.g. own funds requirements) for such companies to prevent harm from the financial market.
The second consultation, which was meanwhile published in the Federal Register as well, seeks comments on proposed revisions to the Council’s interpretive guidance for the determination of whether or not a non-bank financial company should be „designated“ and thus be subject to Federal Reserve supervision and prudential requirements. These revisions would be major in nature and would result in a „new guidance“ that only focuses on „the procedures that the Council would apply in reviewing a non-bank financial company for potential designation“. Specifically, under the proposed new guidance, the Council would apply a multi-tiered approach towards such designation which would include the following steps:
- a preliminary analysis of both quantitative and qualitative information of a company in question and the notification of the company of the performed review. An affected firm would also have the possibility to furnish supplementary information, if it wishes to do so (no mandatory obligation);
- an in-depth analysis of the firm, if the Council determines that the company should be designated for Federal Reserve supervision and subject to prudential requirements. In this stage, the Council would also consult additional information available on the company, e.g. from supervisory authorities or the company itself;
- a proposed final determination upon which the affected firm could request a hearing with the Council and upon which the final determination would be made (or not); and
- the reevaluation of such designation on an annual basis which would permit the affected firm to provide additional information and to consult with the Council on the continuance of the designation. Each year, a new Board vote would have to be made to uphold the designation.