News Release: Regulators Should Swiftly Use New Guidance to Designate Risky Non-Banks


Nov. 3, 2023

Carter Dougherty

Regulators Should Swiftly Use New Guidance to Designate Risky Non-Banks

Washington, D.C. — Federal agencies should move swiftly to identify systemically important financial institutions (SIFIs) for heightened scrutiny now that they have finalized a process for this designation process, according to Americans for Financial Reform Education Fund.

Now that the Financial Stability Oversight Council has, quite rightly, reversed the previous administration’s ill-conceived rule, approved in 2019, that made designations of large non-banks all but impossible, the Treasury-led body has the authority that it needs to start tackling new, and often growing risks in the financial system. AFR-EF has long urged regulators to take this step.

“Many risks in the nonbank sector, from insurance to private equity to hedge funds to asset management, are becoming increasingly serious and in need of closer attention,” said Alexa Philo, senior banking and systemic risk analyst at Americans for Financial Reform Education Fund. “Dramatic growth in size, exposure to risks and connections among these entities and with traditional banks have put regulators in the dark and left the financial system and broader economy dangerously exposed to instability.”

Importantly, FSOC has included climate-related financial risk in its approach, a much-needed recognition that climate change is a significant and growing threat to financial stability.

“The past few years have brought worsening climate impacts that threaten consumers and the financial system, most recently evident in climate-related disruptions to homeowners insurance across the country,” said Alex Martin, climate finance policy director at Americans for Financial Reform Education Fund. “It’s clear that climate risks are growing, partially driven by the actions of nonbanks, and it’s past time for regulators to use this tool to head off further harm.”

FSOC today published its final “Interpretive Guidance” for designation of nonbanks as systemically important, together with its “Analytic Framework” for risk assessment. The guidance restores the FSOC’s ability to use its authority in line with the original direction of Dodd-Frank. Together with the analytic framework, the interpretive guidance creates a toll to fill a major gap in oversight of the unregulated, “shadow bank” sector, particularly the large, complex insurers, private equity, asset managers and hedge funds that present the greatest systemic threats.

Key features of the guidance include:

Restoring critical nonbank oversight authority. The guidance re-affirms the FSOC’s power, granted under Dodd-Frank, to designate nonbanks for prudential regulation by the Federal Reserve. Nonbank SIFI designations are permissible whenever material financial distress at a firm “could pose a threat” to U.S. financial stability. It does away with the “does threaten” standard in the 2019 guidance that made designations all but impossible.

Removing impossible hurdles. The new guidance removes other hurdles, including requiring a focus exclusively on “activities-based” regulation and only allowing SIFI designations in cases of proven material financial distress, substantiated by quantitative evidence, and clearance of the cost-benefit test. The new guidance preserves FSOC’s ability to hone in and address “activities-based” risks, while also freeing it up to use its statutory authority for designation.

Supporting use of both firm-specific and market-based authorities. These powers allow for oversight of firms, products and activities across the financial system, consistent with Dodd-Frank, rather than focusing exclusively on market activities.