In the aftermath of the 2008 Global Financial Crisis, Congress included in the Dodd–Frank Act a set of authorities for regulators to use in response to the systemic risk posed by nonbank financial institutions.
This includes the ability of the FSOC to instruct the Office of Financial Research to collect information on nonbanks, designate systemically important nonbanks to be supervised by the Federal Reserve, and designate systemically important financial market utilities and payment, clearing, and settlement activities for additional risk-management standards. These authorities serve as a basis to begin to address the systemic risk concerns presented by nonbank financial institutions — namely the lack of transparency, prudential supervision, and controls on the use of leverage.
Under the leadership of Secretary Yellen, attention to the systemic risks posed by nonbank financial companies has been a top priority of the FSOC.
In February 2022, the FSOC issued a statement on nonbank financial institutions, announcing the re-establishment of its Hedge Fund Working Group, the establishment of a new Open-end Fund Working Group, and a statement of support for the efforts underway by the Securities and Exchange Commission to reform money market funds and strengthen the short-term funding markets. 1
In addition, the 2022 FSOC Annual Report encouraged regulators to coordinate closely to collect data, identify risks, and strengthen oversight of nonbank companies involved in the origination and servicing of residential mortgages, and FSOC renewed a working group to review the risks and possible regulatory responses. 2
In April 2023, the FSOC published for comment a proposed analytic framework to explain how the Council typically identifies, assesses, and addresses potential risk to financial stability. 3
This framework, which details common vulnerabilities and transmission mechanisms through which shocks can arise and propagate through the financial system is intended to inform the FSOC’s work to review the nonbank issues.
In addition, in April 2023, the FSOC proposed new guidance for how it would review whether to use its authority to designate nonbanks for heightened supervision and resolution planning requirements. The revised guidance would remove several constraints to FSOC designation, while retaining a multistage, deliberative process with opportunities for firm engagement. 4
After carefully reviewing public comments received, the FSOC is meeting today to finalize both the Analytic Framework on Financial Stability Risks and the Interpretive Guidance on Nonbank Financial Company Determinations. I am strongly supportive of both of these proposals.
The Analytic Framework will enhance the transparency of the FSOC’s process for considering financial stability risk, and the Interpretive Guidance will restore the practical use of the designation authority.
These are critical steps to advance the ability of FSOC to address threats to financial stability from nonbank financial institutions. It is important for the FSOC to be willing to utilize all of the tools at its disposal to address this challenging issue.
Let me conclude by thanking Secretary Yellen again for her leadership.