The Financial Stability Oversight Council (Council) is publishing an analytic framework that describes the approach the Council expects to take in identifying, assessing, and responding to certain potential risks to U.S. financial stability. Effective Date: November 14, 2023.
Section 111 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) established the Financial Stability Oversight Council (the Council). The statutory purposes of the Council are “(A) to identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace; (B) to promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the Government will shield them from losses in the event of failure; and (C) to respond to emerging threats to the stability of the United States financial system.”
The Council's duties under section 112 of the Dodd-Frank Act reflect the range of approaches the Council may consider to identify, assess, and respond to potential threats to U.S. financial stability, which include collecting information from regulators, requesting data and analyses from the Office of Financial Research (the OFR), monitoring the financial services marketplace and financial regulatory developments, facilitating information sharing and coordination among regulators, recommending to the Council member agencies general supervisory priorities and principles, identifying regulatory gaps, making recommendations to the Board of Governors of the Federal Reserve System (the Federal Reserve) or other primary financial regulatory agencies, and designating certain entities or payment, clearing, and settlement activities for additional regulation.
The Council's Analytic Framework for Financial Stability Risk Identification, Assessment, and Response (the Analytic Framework) describes the approach the Council expects to take in identifying, assessing, and responding to certain potential risks to U.S. financial stability. The Analytic Framework is intended to help market participants, stakeholders, and other members of the public better understand how the Council expects to perform certain of its duties. It is not a binding rule and does not establish rights or obligations applicable to any person or entity.
The Council issued for public comment the Proposed Analytic Framework for Financial Stability Risk Identification, Assessment, and Response (the Proposed Framework) on April 21, 2023. The comment period was initially set to close after 60 days; however, in response to public requests for additional time to review and comment on the Proposed Framework, the Council extended the comment period by 30 days, to July 27, 2023. Having carefully considered the comments it received, the Council voted to adopt the Analytic Framework at a public meeting on November 3, 2023.
At the same time as the publication of the Proposed Framework, the Council also published proposed interpretive guidance (the Proposed Guidance) regarding its procedures for designating nonbank financial companies for prudential standards and Federal Reserve supervision under section 113 of the Dodd-Frank Act. At its public meeting on November 3, 2023, the Council also adopted a final version of those procedures (the Final Guidance). In response to its request for public input, the Council received 37 comments on the Proposed Framework, of which nine were from companies or trade associations in the investment management industry, two were from trade associations in the insurance industry, six were from other companies or trade associations, 10 were from various advocacy groups, five were from current or former state or federal government officials, two were from groups of academics, and three were from individuals. Most public comments submitted with respect to the Proposed Framework also commented on the Proposed Guidance. For the convenience of the public, the Council addresses many of the issues raised in such dual comments in the preamble to the Final Guidance.
The Analytic Framework provides a narrative description of the approach the Council expects to take in identifying, assessing, and responding to certain potential risks to U.S. financial stability. Accordingly, this preamble omits a duplicative description of the Analytic Framework's content and instead focuses on key changes from the Proposed Framework and on comments received in response to the Proposed Framework. Members of the public should refer directly to the Analytic Framework for greater detail regarding the Council's approach.
Following consideration of public comments on the Proposed Framework, the Analytic Framework reflects several key changes from the Proposed Framework, each as discussed further below: . . .
Financial Stability Oversight Council: Analytic Framework for Financial Stability Risk Identification, Assessment, and Response
I. Introduction
This document describes the approach the Financial Stability Oversight Council (Council) expects to take in identifying, assessing, and responding to certain potential risks to U.S. financial stability.
The Council's practices set forth in this document are among the methods the Council uses to satisfy its statutory purposes: (1) to identify risks to U.S. financial stability that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace; (2) to promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the government will shield them from losses in the event of failure; and (3) to respond to emerging threats to the stability of the U.S. financial system. The Council's specific statutory duties include monitoring the financial services marketplace in order to identify potential threats to U.S. financial stability and identifying gaps in regulation that could pose risks to U.S. financial stability, among others.
Financial stability can be defined as the financial system being resilient to events or conditions that could impair its ability to support economic activity, such as by intermediating financial transactions, facilitating payments, allocating resources, and managing risks. Events or conditions that could substantially impair such ability would constitute a threat to financial stability. Adverse events, or shocks, can arise from within the financial system or from external sources. Vulnerabilities in the financial system can amplify the impact of a shock, potentially leading to substantial disruptions in the provision of financial services. The Council seeks to identify and respond to risks to financial stability that could impair the financial system's ability to perform its functions to a degree that could harm the economy. Risks to financial stability can arise from widely conducted activities or from individual entities, and from long-term vulnerabilities or from sources that are new or evolving.
This document describes the Council's analytic framework for identifying, assessing, and responding to potential risks to financial stability. The Council seeks to reduce the risk of a shock arising from within the financial system, to improve resilience against shocks that could affect the financial system, and to mitigate financial vulnerabilities that may increase risks to financial stability. The actions the Council may take depend on the nature of the vulnerability. For example, vulnerabilities originating from activities that may be widely conducted in a particular sector or market over which a regulator has adequate existing authority may be addressed through an activity-based or industry-wide response; in contrast, in cases where the financial system relies on the ongoing financial activities of a small number of entities, such that the impairment of one of the entities could threaten financial stability, or where a particular financial company's material financial distress or activities could pose a threat to financial stability, entity-based action may be appropriate. The Council's authorities, some of which are described in section II.c, are complementary, and the Council may select one or more of those authorities to address a particular risk.
Among the many lessons of financial crises are that risks to financial stability can be diverse and build up over time, dislocations in financial markets and failures of financial companies can be sudden and unpredictable, and regulatory gaps can increase risks to financial stability. The Council was created in the aftermath of the 2007–2009 financial crisis and is statutorily responsible for identifying and preemptively acting to address potential risks to financial stability. Many of the same factors, such as leverage, liquidity risk, and operational risks, regularly recur in different forms and under different conditions to generate risks to financial stability. At the same time, the U.S. financial system is large, diverse, and continually evolving, so the Council's analytic methodologies adapt to address evolving developments and risks.
This document is not a binding rule, but is intended to help market participants, stakeholders, and other members of the public better understand how the Council expects to perform certain of its duties. The Council may consider factors relevant to the assessment of a potential risk or threat to U.S. financial stability on a case-by-case basis, subject to applicable statutory requirements. The Council's annual reports describe the Council's work in implementing its responsibilities. . . .
Press release:
https://home.treasury.gov/news/press-releases/jy1876
FRN:
https://www.federalregister.gov/d/2023-25055 [12 pages]
