The US Financial Stability Oversight Council (FSOC) has proposed rule changes that may tighten financial scrutiny of non-bank financial companies if they are deemed to present a threat to financial stability.
This will potentially throw a tighter regulatory net over a wider range of financial institutions that do not have a banking licence — including pension funds, insurance funds and mutual funds — but are felt, owing to their size, strategic importance or risk-management practices, to present a threat to the stability of the financial ecosystem.
The proposed rules, which build on guidance issued in 2019, seek to review categorisation of non-bank financial companies under section 113 of the Dodd Frank Act, giving the Council additional powers to counter risks to financial stability while ensuring public transparency around this process.
Under the proposals, the potential risks presented by non-bank financial institutions will be evaluated through a two-stage process.
The first stage will involve a preliminary analysis based on quantitative and qualitative information available to the Council principally through public and regulatory channels. The Council will inform the company when this first stage of assessment is ongoing and will provide opportunity for the company to provide further relevant information.
If this initial assessment suggests a need for further evaluation, the company will be subject in Stage 2 to an in-depth assessment based on additional information collected directly from the company concerned.
At the end of Stage 2, the Council may consider whether it wishes to designate the company for additional supervisory requirements. The company may request a hearing at this stage.
The Council will also encourage the company or its regulators to take steps to mitigate the risks that it has identified. It will review this designation at least every 12 months and will remove the designation if it believes that the company no longer presents a significant threat to financial stability.
More broadly, the Council has put forward a new analytical framework for identifying, evaluating and countering potential risks to financial stability and this analytical framework has been circulated for public comment.
Formed in 2010, the FSOC is chaired by the US Treasury Secretary and combines the expertise of federal financial supervisors, state regulators and an independent expert on insurance appointed by the US President. It exists to evaluate, monitor and mitigate risks to US financial stability.
