Treasury recommends changes to FSOC SIFI | KPMG | US

Treasury recommends changes to FSOC SIFI designations processes

Treasury recommends changes to FSOC SIFI

Amending the $50 billion consolidated assets threshold used as an evaluation criteria for nonbank financial institutions

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Key Points

  • Amending the $50 billion consolidated assets threshold used as an evaluation criteria for nonbank financial institutions “to more appropriately tailor it to the risk that an institution could pose to financial stability” and changing the designation process to emphasize an activities-based approach.
  • Providing clear guidance about risks and mitigating factors to facilitate an “off-ramp” before and after SIFI designation.
  • Retaining the current process for designating financial market utilities as SIFIs but with some enhancements.
     

Key Recommendations

The Department of the Treasury released its report on the Financial Stability Oversight Council (FSOC) and its processes for designating nonbank financial companies and financial market utilities (FMUs) as systemically important financial institutions (SIFIs). Treasury encourages the FSOC to prioritize the identification of particular financial activities or products that could pose risks to U.S. financial stability and then work with the primary financial regulatory agencies to use their existing authorities to address and mitigate these risks. Company-specific designations should be considered once it is determined that the risk to financial stability cannot be otherwise addressed.

In addition,Treasury suggests several other changes to the designations processes.

  • SIFI threshold: Treasury recommends changing the $50 billion consolidated assets threshold used to assess nonbank financial institutions “to more appropriately tailor it to the risk that an institution could pose to financial stability.” Other recommended changes to the analytical process include assessing the likelihood of a firm’s material financial distress and mitigating factors as well as using cost-benefit analysis to determine if the expected benefits to financial stability outweigh the costs of designating a company.
  • Designation off-ramp: Treasury emphasizes communicating identified risks and mitigating factors to provide the company with an “off-ramp” both before and after SIFI designation. Treasury also recommends clarifying the annual reevaluation process and enabling a company to discuss potential risk mitigation and receive feedback on how to address FSOC concerns. The standards for initial designation and the annual reevaluation should be the same.
  • FMU designations: Treasury recommends retaining the FSOC’s current and separate process for FMU designations but making certain enhancements similar to recommendations for nonbank financial institutions. These include coordinating with primary financial regulators, using cost-benefit analyses, communicating areas of potential risk, and publishing the basis for designations made.

 

Closing Thoughts

Treasury’s recommendations to the FSOC’s SIFI designation process, including the $50 billion consolidated assets threshold for nonbank financial institutions, can be primarily implemented by the FSOC and the regulatory agencies directly rather than through legislation. Notably, Treasury’s recommendations to change the process mark a clear break from earlier proposals to eliminate that authority altogether.

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