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    FSOC Consults on Analytic Framework for Financial Stability Risks

    April 28, 2023

    The Financial Stability Oversight Council seeks comments on proposed analytic framework that sets forth the proposed approach to identifying, assessing, and responding to certain potential risks to the U.S. financial stability. It also sets out the proposed interpretative guidance on nonbank financial company determinations that describes the process FSCO intends to take in determining whether to subject a nonbank financial company to supervision and prudential standards by the Board of Governors of the Federal Reserve System (FED). The comment period for both the consultations ends on June 27, 2023.

    The proposed analytic framework describes the approach to take in identifying, assessing, and responding to potential risks to U.S. financial stability, regardless of whether those risks arise from activities, individual firms, or otherwise. The proposed analytic framework outlines common vulnerabilities and transmission channels through which shocks can arise and propagate through the financial system. It explains how FSOC considers the tools it will use to address such risks. The framework lists certain vulnerabilities that most commonly contribute to risk to financial stability: leverage; liquidity risk, and maturity mismatch; interconnections; operational risks; complexity and opacity; inadequate risk management; concentration; and destabilizing activities. The framework also provides sample metrics associated with the listed vulnerabilities. FSOC has identified four channels as most likely to facilitate the transmission of the negative effects of a risk to financial stability: exposures; asset liquidation; critical function or service; and contagion. FSOC seeks comments, among other aspects, on whether there are potential interactions between or among these vulnerabilities and transmission channels that the proposed analytic framework should address.

    The proposed interpretive guidance on nonbank financial company determinations seeks to establish a durable process for designations of nonbank financial companies under section 113 of the Dodd-Frank Act. The proposed guidance is intended to enhance the ability to address risks to financial stability, provide transparency to the public, and ensure a rigorous and clear designation process. The new proposed guidance would revise and update the 2019 Interpretive Guidance. Unlike the guidance adopted by FSOC in 2019, the proposed guidance focuses exclusively on the procedures that would apply in reviewing a nonbank financial company for potential designation. With respect to the procedures for designations and annual reevaluations of designations, the proposed guidance would preserve the significant engagement and communication between FSOC and a nonbank financial company under review for potential designation, and with the company’s primary regulator—the aspects that were called for in the 2019 Interpretive Guidance. The proposed guidance is intended to enable FSOC to use its statutory authorities as appropriate while maintaining rigorous procedural protections for nonbank financial companies that may be reviewed for potential designation.  


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    Keywords: Americas, US, Banking, Financial Stability, Systemic Risk, NBFC, Basel, Analytic Framework, Guidance, Non Bank Financial Company, Dodd Frank Act, FED, FSOC

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