- Systemic-risk council proposes guidance to set new approach
- Last year, FSOC abandoned the last of its risk labels on firms
— The group of U.S. regulators responsible for guarding against the threat of future financial crises is embracing a new approach to spotting potential risks
— shifting away from identifying individual firms and focusing on specific activities that could pose hazards.
The Financial Stability Oversight Council
— whose members include the heads of the Treasury Department and the Federal Reserve
— outlined the proposed revisions to the way it will do business at a meeting in Washington on Wednesday.
The group agreed with its chair, Treasury Secretary Steven Mnuchin, on what he called “significant improvements” that would make it more difficult for FSOC to declare companies such as American International Group Inc. as threats to the financial system. Instead, when the council identifies a risky activity, it will work with the regulator of that area to address it.
Designations of individual firms would be tougher to make, requiring a cost-benefit analysis and a review of whether the firm is really likely to run into trouble, according to the guidance. The process for designating a company would also be compressed from three stages to two and FSOC would set a clearer path for risk-labeled firms to get out.
Risk designations were the biggest power of the council, which was created by the Dodd-Frank Act to act as fire watchers to head off another crisis. In its initial years, the group affixed risk tags on four of the biggest nonbank financial firms, including the U.S. insurance giants. That list thinned out in recent years as the companies restructured or challenged the designations. In the end, FSOC released AIG and the final designee, Prudential Financial Inc.
Republican lawmakers had long criticized the designations, and Treasury proposed a road map in 2017 that would make it harder to affix the risk tags. The plan urged the council to focus on how an entire industry might pose risks, rather than prioritizing the dangers presented by specific firms.
The council stopped labeling individual companies years ago, but the power to do so still makes big asset managers and insurance companies nervous.
Source: Bloomberg Government