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11/3/2023 FSOC Approves Analytic Framework for Financial Stability Risks and Guidance on Nonbank Financial Company Determi… FSOC Approves Analytic Framework for Financial Stability Risks and Guidance on Nonbank Financial Company Determinations November 3, 2023 WASHINGTON – The Financial Stability Oversight Council (Council) today unanimously voted to issue final versions of a new analytic framework for financial stability risks and updated guidance on the Councilʼs nonbank financial company determinations process. The Councilʼs new Analytic Framework for Financial Stability Risk Identification, Assessment, and Response (Analytic Framework) o ers a detailed public explanation of how the Council monitors, assesses, and responds to potential risks to financial stability, whether they come from widely conducted activities or from individual firms. The Analytic Framework details the vulnerabilities and transmission channels that most commonly contribute to risks to financial stability, and it explains the range of authorities the Council may use to address any particular risk – including interagency coordination, recommendations to regulators, or the designation of certain entities. The updated Guidance for Nonbank Financial Company Determinations (Nonbank Designations Guidance) sets forth the Councilʼs procedures for considering whether to designate a nonbank financial company for Federal Reserve supervision and prudential standards under section 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The Nonbank Designations Guidance provides a transparent process and significant opportunities for engagement with both a nonbank financial company under review and its existing regulators. “Financial stability is a public good, and we need a robust structure to monitor and address the build-up of risks that could threaten the financial system,” Secretary of the Treasury Janet L. Yellen said. “Congress created FSOC a er the global financial crisis to identify and respond to risks to financial stability, and our actions today go to the heart of fulfilling that critical mission. Establishing an analytic framework and a durable process for the Councilʼs use of its designation authority will strengthen our ability to mitigate the risks of financial crises that can devastate businesses and households.” Todayʼs actions by the Council will: https://home.treasury.gov/news/press-releases/jy1876 1/6 11/3/2023 FSOC Approves Analytic Framework for Financial Stability Risks and Guidance on Nonbank Financial Company Determi… Improve the Councilʼs ability to address risks to financial stability. By identifying common vulnerabilities and establishing clear procedures for the Council, the Analytic Framework and the Nonbank Designations Guidance create e ective approaches for the Council to use any of its authorities to identify and respond to potential risks to U.S. financial stability. The Council will not prioritize the use of any one authority over others; the Councilʼs response to any potential risk to financial stability will be based on an assessment of the circumstances. The Nonbank Designations Guidance continues to provide for the use of an activities-based approach to address risks to financial stability where appropriate. Provide greater public transparency. The Analytic Framework provides new insight into how the Council will monitor the financial system for potential financial stability risks, evaluate identified risks, and act to mitigate risks. For the first time, the Analytic Framework explains how the Council considers risks irrespective of their source, and how the Council addresses risks using the full range of its authorities. Ensure a rigorous and transparent designation process. The Nonbank Designations Guidance maintains the Councilʼs strong existing processes for companies that the Council considers for potential designation. Under the Nonbank Designations Guidance, there is a multi-step process of significant engagement with a company under review and its primary financial regulator, enabling a company to act to mitigate risks identified by the Council. The Council issued a Proposed Analytic Framework and Proposed Nonbank Designations Guidance for public comment in April 2023 and provided for a 90-day comment period. The documents approved by the Council today reflect feedback from the public. The Analytic Framework will be e ective upon publication in the Federal Register, and the Nonbank Designations Guidance will be e ective 60 days a er publication in the Federal Register. OVERVIEW OF T HE ANALY T IC F RAMEW ORK The Analytic Framework increases public transparency by describing the Councilʼs process for identifying, assessing, and addressing risks to financial stability, irrespective of their source or the tool the Council may use to address any particular risk, as described below. Identifying potential risks. The Dodd-Frank Act requires the Council to monitor the financial services marketplace to identify potential threats to financial stability. The Analytic Framework describes “threat to financial stability” as events or conditions that could https://home.treasury.gov/news/press-releases/jy1876 2/6 11/3/2023 FSOC Approves Analytic Framework for Financial Stability Risks and Guidance on Nonbank Financial Company Determi… substantially impair the financial systemʼs ability to support economic activity. In light of its statutory mandate, under the Analytic Framework the Council monitors a broad range of asset classes, institutions, and activities, ranging from debt markets to central counterparties to banks and nonbank entities. Potential risks to financial stability identified by the Council are o en described in the Councilʼs annual reports and other public statements. Assessing potential risks. When the Council has identified a potential risk to financial stability, the Council evaluates the risk to determine whether it merits further review or action. The Councilʼs assessment of any potential risk will be highly fact-specific, but the Analytic Framework identifies certain vulnerabilities that most commonly contribute to such risks and certain channels through which risks are most likely to be transmitted through the financial system. These vulnerabilities and transmission channels provide transparency regarding how the Council assesses risks across a range of issues and sectors. Vulnerabilities. The Analytic Framework identifies eight vulnerabilities that most commonly contribute to risks to financial stability: leverage; liquidity risk and maturity mismatch; interconnections; operational risks; complexity or opacity; inadequate risk management; concentration; and destabilizing activities. Each of these vulnerabilities is described in detail in the Analytic Framework. The Analytic Framework also includes sample quantitative metrics that may be useful in assessing these vulnerabilities. The listed vulnerabilities may arise from broadly conducted activities or from particular entities; they do not dictate the use of a specific authority by the Council to respond to an identified risk to financial stability. Transmission channels. To assess a potential risk to financial stability, the Council considers how the adverse e ects of the risk could be transmitted to financial markets or market participants and what impact the potential risk could have on the financial system. The Analytic Framework describes four channels that are most likely to facilitate the transmission of the negative e ects of a risk to financial stability: exposures, asset liquidation, critical function or service, and contagion. Addressing potential risks. The Council has a range of statutory authorities and is not prioritizing the use of any authorities over others. The Council will take di erent approaches to mitigate di erent identified risks to financial stability, depending on the circumstances. When a potential risk to financial stability is identified, the Council may consider using any of the Councilʼs authorities. As described in the Analytic Framework, the Councilʼs relevant authorities may include: https://home.treasury.gov/news/press-releases/jy1876 3/6 11/3/2023 FSOC Approves Analytic Framework for Financial Stability Risks and Guidance on Nonbank Financial Company Determi… Interagency coordination and information sharing. In many cases, the Council works with relevant federal and state financial regulatory agencies to seek the implementation of appropriate actions to ensure a potential risk is adequately addressed. If existing regulators can address a risk to financial stability in a su icient and timely way, the Council generally encourages those regulators to do so. Recommendations to agencies or Congress. Section 120 of the Dodd-Frank Act gives the Council authority to make formal, nonbinding recommendations to primary financial regulators to apply new or heightened standards and safeguards for a financial activity or practice. Before issuing a recommendation under section 120, the Council will consult with the relevant primary financial regulator and provide the public with an opportunity to comment on the proposed recommendations. Where no primary financial regulator exists for the markets or companies at issue, the Council may report to Congress on recommendations for legislation that would mitigate threats financial stability. Nonbank financial company determinations. In certain cases, the Council may evaluate a nonbank financial company to determine whether to designate the company for Federal Reserve supervision and prudential standards. Such determinations would follow the process described in the Nonbank Designations Guidance, summarized below. Payment, clearing, and settlement activity designation. Under Title VIII of the Dodd-Frank Act, the Council may designate payment, clearing, and settlement activities that are, or are likely to become, systemically important. Financial market utility designation. Under Title VIII of the Dodd-Frank Act, the Council may designate financial market utilities that are, or are likely to become, systemically important. OVERVIEW OF T HE NONB ANK DESIGNAT IONS GUIDANCE The Nonbank Designations Guidance the Council approved today replaces the Councilʼs previous guidance and establishes a durable process for the Councilʼs review of nonbank financial companies for potential designation under section 113 of the Dodd-Frank Act. Under the Nonbank Designations Guidance, the Councilʼs designation process is built on transparency and engagement with a company under review and its existing primary financial regulator, if any. Through this process, any Council designation of a nonbank financial company will be based on data-driven analyses that reflect the distinctive aspects of the company, its market, and its existing regulation. The Nonbank Designations Guidance does https://home.treasury.gov/news/press-releases/jy1876 4/6 11/3/2023 FSOC Approves Analytic Framework for Financial Stability Risks and Guidance on Nonbank Financial Company Determi… not make designation the Councilʼs default method for addressing risks to financial stability, and the Nonbank Designations Guidance does not eliminate the Councilʼs use of an activitiesbased approach to address risks to financial stability when the Council finds it to be appropriate. Instead, the Nonbank Designations Guidance puts the Councilʼs designation authority on equal footing with its other authorities. Under the Nonbank Designations Guidance, the Council generally expects to follow a twostage process when determining whether a nonbank financial company should be subject to Federal Reserve supervision and prudential standards. Stage 1. During the first stage of the process, a nonbank financial company identified for review would be subject to a preliminary analysis, based on quantitative and qualitative information available to the Council primarily through public and regulatory sources. The Council will notify the firm at least 60 days before the Council votes on whether to evaluate the company further in the second stage of review, to provide the company with an opportunity to voluntarily submit relevant information to the Council and to meet with sta who are leading the Councilʼs analysis. Stage 2. Following Stage 1, any nonbank financial company that is selected for additional review will receive notice that the company would be subject to in-depth evaluation during the second stage of review. Stage 2 involves significant engagement with the company under review and its primary financial regulator. The Council will submit to the company a request for information, and the company will be provided an opportunity to submit information it deems relevant. The Council will make sta representing its members available to meet with the representatives of the company, including to explain the evaluation process and the framework for the Councilʼs analysis. Proposed and final designations. At the end of Stage 2, the Council may consider whether to make a proposed designation of the nonbank financial company. A proposed designation requires a vote of two-thirds of the voting members of the Council then serving, including an a irmative vote by the Chairperson of the Council. If the Council makes a proposed designation, the Council will provide the company with a written explanation of the basis of the proposed determination, and the nonbank financial company may request a written or oral hearing. A er any requested hearing, the Council may vote to make a final designation, which again requires a vote of two-thirds of the voting members of the Council then serving, including an a irmative vote by the Chairperson of the Council. The Council will publicly release the written explanation of the basis for any final designation. https://home.treasury.gov/news/press-releases/jy1876 5/6 11/3/2023 FSOC Approves Analytic Framework for Financial Stability Risks and Guidance on Nonbank Financial Company Determi… Annual reevaluations of designations. For any designated company, the Council intends to encourage the company or its regulators to take steps to mitigate the identified risks. The Council will reevaluate the designation at least annually and rescind the designation if the Council determines that the company no longer meets the statutory standards for a designation. During the Councilʼs annual reevaluations, the company will have an opportunity to meet with representatives of the Council to discuss the review and submit information. Council representatives will endeavor to provide feedback on the extent to which any company proposals to mitigate identified risks may address the risks. Further, if the Council votes not to rescind a designation, the Council will provide the company with a written explanation addressing the material factors in the analysis. ADDIT IONAL INF ORMAT ION The full text of the analytic framework is available here . The full text of the nonbank financial company designations guidance is available here . A copy of Secretary Yellenʼs remarks on the analytic framework and nonbank financial company designations guidance during the Councilʼs open session can be found here. ### https://home.treasury.gov/news/press-releases/jy1876 6/6
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