FSOC Extends Comment Deadline on Proposed Guidance for Designating Nonbank Financial Institutions

The Financial Stability Oversight Council ("FSOC") extended the comment deadline until July 27, 2023 on (i) proposed new interpretative guidance on the process for designating nonbank financial institutions for heightened Federal Reserve Board ("FRB") supervision, and (ii) a proposed analytic framework for "identifying, assessing and addressing" financial stability risks. The comment extension was published in the Federal Register.

As previously covered, the FSOC proposed amendments to the "Interpretive Guidance on Nonbank Financial Company Determinations" would require "significant engagement and communication" between FSOC and any nonbank financial institution under review for designation (see prior coverage). FSOC said that that the proposal would update the interpretive guidance to:

• eliminate the requirement that FSOC must first rely on federal and state regulators to address financial stability risks before FSOC considers designating the financial institution;
• implement a "broader approach" to assess potential risks to U.S. financial stability which FSOC detailed in a separate "analytic framework" document for public comment (see below); and
• eliminate language requiring FSOC to conduct a cost-benefit analysis of a financial institution’s material financial distress (FSOC found the assessment to be "not useful or appropriate").

FSOC also requested comments on a proposed analytic framework on financial stability risks. The proposed framework addresses (i) how to evaluate risks to U.S. financial stability stemming from material financial stress or failure from nonbank financial institutions, (ii) how to encourage market discipline and (iii) emerging threats to the stability of the U.S. financial system. FSOC stated that the analytic framework would:

• identify potential risks to U.S. financial stability which would cover an "expansive range" of asset classes, entity types and financial activities;
• assess potential risks to evaluate whether further review or action is necessary by applying (i) a "highly fact-specific" evaluation of identified vulnerabilities that commonly lead to financial stability risks and (ii) quantitative metrics to measure the vulnerabilities; and
• address potential risks through various approaches, including using mitigation tools as needed to (i) reduce the risk of shock within the financial system, (ii) mitigate financial vulnerability and (iii) "improve the resilience of the financial system to shocks."