Analytic Framework and Guidance for identifying, assessing, and responding to potential bank and nonbank financial stability risks
Regulatory Insights
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November 2023
The Financial Stability Oversight Council (FSOC) issues:
The Analytic Framework outlines how the FSOC “expects to” 1) identify, 2) assess, and 3) respond to potential financial stability risks (independent of whether those risks arise from activities, firms, or otherwise), and is intended to decrease the risk of “shocks” arising from within the financial system, improving resilience against shocks that could affect the financial system, and mitigating financial vulnerabilities that may increase risks to financial stability.
Key changes from proposal. The framework is adopted largely as proposed, with several key changes based on comments received, including:
Final Analytic Framework.
1) Identify. Risk monitoring under the Analytic Framework would include:
2) Assess. The FSOC identifies a non-exhaustive, non-exclusive list of vulnerabilities and related quantitative metrics that it states most commonly contribute to potential stability risks, including:
Transmission Channels. Additionally, the FSOC identifies four channels that may facilitate the transmission of “negative effects” of a financial stability risk to financial markets or market participants, as well as specific vulnerabilities in each channel and areas that the framework analyzes:
(Note: The framework acknowledges that FSOC’s analyses consider market participants’ varying risk profiles and business models, but that the framework is not intended to address sector-specific distinctions but rather to address FSOC’s “overarching approach to financial stability risks regardless of their origin.”
3) Respond. Following identification and assessment, the FSOC’s Deputies Committee will direct one or more of the FSOC’s staff-level committees or working groups to consider potential policy approaches or actions to address the potential risk (as appropriate), including but not limited to:
Effective Date. The Analytic Framework is effective as of the date of publication in the Federal Register.
As proposed, the FSOC’s final interpretive guidance sets forth three changes to the FSOC’s 2019 Interpretive Guidance, the process by which the FSOC determines (or “designates”) whether to subject a nonbank financial company to supervision and prudential standards by the Federal Reserve Board (FRB). These changes include:
In addition, the final guidelines incorporate the definition of a “threat to the financial stability” adopted in the FSOC’s Analytic Framework. As such, “events or conditions that could substantially impair the financial system’s ability to support economic activity would constitute a threat to financial stability.”
Process for nonbank financial company determinations. Under the final guidance, the process for nonbank financial company determinations will include:
Evaluation: Stage 1 - As identified through the Analytic Framework processes and using quantitative and qualitative information from public and regulatory sources | The company would be notified of the review and may, but would not be required, to provide information. The company and its subsidiaries may be evaluated separately or together. The company’s primary financial regulator will be consulted as part of the preliminary evaluation. The company will be notified of the review (at least sixty (60) days in advance of an FSOC vote to proceed to Evaluation Stage 2. The FSOC will vote on whether to advance the company to a more significant Stage 2 review, but notes that even Stage 2 review does not constitute a final decision on designation. A decision not to advance the company to Stage 2 does not preclude the FSOC from reinitiating a review. |
Evaluation: Stage 2 – “In-depth Evaluation” Using information collected directly from the company as well as from public and regulatory information. |
To consider whether “material financial distress at the nonbank financial company, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the company, could pose a threat to U.S financial stability.” The FSOC may discontinue its consideration of the company for a potential determination if the FSOC believes actions taken by the company’s regulator (using its existing authorities) or by the company “adequately” address the potential financial stability risk identified by the FSOC.
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Determination: Proposed Based on findings during Stage 2, the FSOC may vote to Propose Determination. |
Requires a two-thirds vote of the FSOC members then serving, including an affirmative vote of the FSOC Chair. The FSOC will provide written notice, including an explanation of the basis for the Proposed Determination, to the company and its primary financial regulator. The company will be permitted to request a hearing to contest the Proposed Determination.
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Determination: Final Following any requested hearing, the FSOC may vote to make a Final Determination.
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Requires a two-thirds vote of the FSOC members then serving, including an affirmative vote of the FSOC Chair. The FSOC will publicly announced the Final Determination at least one day after providing written notice to the company and its primary financial regulator. The notice would highlight key risk that led to the Final Determination and guidance regarding important factors to the Council. The company may bring an action in U.S. District Court for an order to rescind the Final Determination. Upon designation, the company would be subject to supervision by the FRB and prudential standards.
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Reevaluation At least annual reevaluation to assess material changes using the same standards of review applied during the initial determination.
| The company will have opportunities to meet with the FSOC and to provide additional information. If a company contests the determination during the annual evaluation, the FSOC will vote on whether to rescind. Moreover, every five (5) years, each company can request an oral hearing to contest their designation. The FSOC would vote to rescind the determination if the potential risks that existed at the time of the Final Determination – based on steps to mitigate the risk taken by the company or its regulator – no longer exist and the FSOC determines the company no longer meets the statutory standards for designation. |
Effective Date. The final interpretive guidance on nonbank designations will become effective sixty (60) days after the date of publication in the Federal Register.
Financial Stability, Nonbank Supervision: FSOC Final Guidance
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