FSOC adopts framework for determining financial stability risk, nonbank supervision

The Financial Stability Oversight Council today adopted a new analytic framework for gauging financial stability risks and approved updated guidance for determining whether nonbanks should be subject to Federal Reserve supervision.

In a statement, the FSOC said the new framework will increase public transparency about its process for identifying and assessing risks. Specifically, the 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. The framework also identifies the various approaches the council could take to address potential risks, ranging from recommending agency action to designating certain activities systemically important.

The FSOC can designate nonbank financial companies as subject to Fed supervision. The updated guidance establishes a two-stage process for determining whether a nonbank merits designation, starting at stage one with preliminary analysis. The second stage involves an in-depth evaluation and “significant engagement” with the company under review and its primary financial regulator. A designation requires a vote of two-thirds of the voting members of the council, including an affirmative vote by the chair.