Proposed Rule2026-06114
Authority To Require Supervision and Regulation of Certain Nonbank Financial Companies
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Published
March 30, 2026
Issuing agencies
Financial Stability Oversight Council
Abstract
This proposed interpretive guidance, which would replace the Financial Stability Oversight Council's existing interpretive guidance on nonbank financial company determinations and its analytic framework for financial stability risks, describes the approach the Council intends to take in prioritizing its work to identify and address potential risks to U.S. financial stability using an activities-based approach, and enhancing the Council's analytical rigor and transparency.
Full Text
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[Federal Register Volume 91, Number 60 (Monday, March 30, 2026)]
[Proposed Rules]
[Pages 15551-15566]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-06114]
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FINANCIAL STABILITY OVERSIGHT COUNCIL
12 CFR Part 1310
Authority To Require Supervision and Regulation of Certain
Nonbank Financial Companies
AGENCY: Financial Stability Oversight Council.
ACTION: Notification of proposed interpretive guidance; request for
public comment.
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SUMMARY: This proposed interpretive guidance, which would replace the
Financial Stability Oversight Council's existing interpretive guidance
on nonbank financial company determinations and its analytic framework
for financial stability risks, describes the approach the Council
intends to take in prioritizing its work to identify and address
potential risks to U.S. financial stability using an activities-based
approach, and enhancing the Council's analytical rigor and
transparency.
DATES: Comment due date: May 14, 2026.
ADDRESSES:
Electronic Submission of Comments: You may submit comments
electronically through the Federal eRulemaking Portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a>. All submissions must refer to the document title
and RIN 4030-[XXXX]. Electronic submission of comments allows the
commenter maximum time to prepare and submit a comment, ensures timely
receipt, and enables the Council to make them available to the public.
Comments submitted electronically through the <a href="https://www.regulations.gov">https://www.regulations.gov</a> website can be viewed by other commenters and
interested members of the public. Commenters should follow the
instructions provided on that site to submit comments electronically.
All properly submitted comments will be available for inspection
and downloading at <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
In general, comments received, including attachments and other
supporting materials, are part of the public record and are available
to the public. Do not submit any information in your comment or
supporting materials that you consider confidential or inappropriate
for public disclosure.
FOR FURTHER INFORMATION CONTACT: Eric Froman, Office of the General
Counsel, Treasury, at (202) 622-1942, or
<a href="/cdn-cgi/l/email-protection#3d7b6e727e6d485f51545e7e5250505853494e7d494f585c4e484f44135a524b"><span class="__cf_email__" data-cfemail="7533263a36250017191c16361a1818101b010635010710140600070c5b121a03">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Background
Section 111 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (12 U.S.C. 5321) (the ``Dodd-Frank Act'') established
the Financial Stability Oversight Council. The purposes of the Council
under section 112 of the Dodd-Frank Act (12 U.S.C. 5322) 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 Dodd-Frank Act gives the Council broad discretion to determine
how to respond to potential threats to U.S. financial stability,
including collecting information from regulators, requesting data and
analyses from the Office of Financial Research, 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
(``Federal Reserve'') or other primary financial regulatory
agencies,\1\ and designating certain entities or payment, clearing, and
settlement activities for additional regulation.
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\1\ ``Primary financial regulatory agency'' is defined in
section 2(12) of the Dodd-Frank Act, 12 U.S.C. 5301(12).
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Section 113 of the Dodd-Frank Act authorizes the Council to
determine that a nonbank financial company will be subject to
supervision by the Federal Reserve and prudential standards. Under
section 165 of the Dodd-Frank Act, the Federal Reserve is responsible
for establishing the prudential standards that will be applicable to a
nonbank financial company subject to a Council designation \2\ under
section 113.
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\2\ Section 113 of the Dodd-Frank Act, 12 U.S.C. 5323, refers to
a Council ``determination'' regarding a nonbank financial company.
This proposal refers to ``determination'' and ``designation''
interchangeably for ease of reading.
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The Council has previously issued rules, guidance, and other public
statements regarding its process for evaluating nonbank financial
companies
[[Page 15552]]
for a potential designation.\3\ On April 11, 2012, the Council issued a
final rule at 12 CFR 1310.1-23 (the ``2012 Rule'') setting forth
certain procedures related to designations under section 113 of the
Dodd-Frank Act. Attached to the 2012 Rule as Appendix A was
interpretive guidance (the ``2012 Interpretive Guidance'') setting
forth additional information regarding the manner in which the Council
made determinations under section 113 (together with the 2012 Rule, the
``2012 Rule and Guidance''). On February 4, 2015, the Council adopted
supplemental procedures (the ``2015 Supplemental Procedures'') to the
2012 Rule and Guidance.\4\ On March 13, 2019, the Council amended the
2012 Rule by adding a new provision at 12 CFR 1310.3.\5\ On December
30, 2019, the Council replaced the 2012 Interpretive Guidance with
revised interpretive guidance (the ``2019 Interpretive Guidance'').\6\
In connection with the adoption of the 2019 Interpretive Guidance, the
Council rescinded the 2015 Supplemental Procedures.
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\3\ On May 22, 2012, the Council approved hearing procedures
relating to the conduct of hearings before the Council in connection
with proposed determinations regarding nonbank financial companies
and financial market utilities and related emergency waivers or
modifications under sections 113 and 804 of the Dodd-Frank Act, 12
U.S.C. 5323, 5463; 77 FR 31855 (May 30, 2012). The hearing
procedures were amended in 2013, 78 FR 22546 (April 16, 2013), and
2018, 83 FR 12010 (March 19, 2018). This proposed guidance would not
amend the Council's hearing procedures.
\4\ Financial Stability Oversight Council Supplemental
Procedures Relating to Nonbank Financial Company Determinations
(Feb. 4, 2015), available at <a href="https://home.treasury.gov/system/files/261/Supplemental%20Procedures%20Related%20to%20Nonbank%20Financial%20Company%20Determinations%20%20%28February%204%2C%202015%29.pdf">https://home.treasury.gov/system/files/261/Supplemental%20Procedures%20Related%20to%20Nonbank%20Financial%20Company%20Determinations%20%20%28February%204%2C%202015%29.pdf</a>. In
addition, in June 2015, the Council published staff guidance with
details regarding certain methodologies used in connection with the
determination process under section 113. See Council, Staff Guidance
Methodologies Relating to Stage 1 Thresholds (June 8, 2015),
available at <a href="https://home.treasury.gov/system/files/261/Staff%20Guidance%20">https://home.treasury.gov/system/files/261/Staff%20Guidance%20</a>Methodologies%20Relating%20to%20Stage%201%20Thresh
olds.pdf.
\5\ 84 FR 8958 (March 13, 2019).
\6\ 84 FR 71740 (Dec. 30, 2019).
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On November 14, 2023, the Council approved revised guidance (the
``2023 Interpretive Guidance'') \7\ that replaced the 2019 Interpretive
Guidance and published an analytic framework to describe the approach
that the Council expected to take in identifying, assessing, and
responding to certain potential risks to U.S. financial stability (the
``2023 Analytic Framework'').\8\
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\7\ 88 FR 80110 (Nov. 17, 2023).
\8\ 88 FR 78026 (Nov. 14, 2023).
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The Council is proposing this interpretive guidance (the ``Proposed
Guidance'') to revise and update the 2023 Interpretive Guidance. If the
Council issues final interpretive guidance based on this proposal, the
final interpretive guidance will replace the 2023 Interpretive Guidance
found at Appendix A to 12 CFR part 1310, in its entirety, but will not
modify the rules at 12 CFR 1310.1-23. In addition, if the Council
issues final interpretive guidance based on this proposal, it intends
to rescind the 2023 Analytic Framework.
II. Overview of Proposed Guidance
The Proposed Guidance would help ensure that the Council's work is
clear, transparent, and analytically rigorous, and enhance the
Council's engagement with companies, regulators, and other
stakeholders. By issuing clear and transparent guidance, the Council
seeks to provide the public with sufficient information to understand
the Council's concerns regarding risks to U.S. financial stability,
while appropriately protecting information submitted by companies and
regulators to the Council.
A. Overview of Changes From 2023 Interpretive Guidance
The Proposed Guidance would make a number of key changes and other
modifications to the Council's existing procedures. Following are high-
level descriptions of several of the most important changes, along with
other modifications, which are explained in greater detail below.
First, under the Proposed Guidance, the Council would update its
analytic methodologies, including a new list of types of
vulnerabilities that most commonly contribute to potential risks to
U.S. financial stability. In addition, the Proposed Guidance explains
that the Council would consider impediments to economic growth and
economic security when identifying potential risks to U.S. financial
stability. The Proposed Guidance notes that the Council works with
member agencies to consider whether elements of the U.S. financial
regulatory framework are fit for purpose or impose undue burdens that
could constrain economic growth, thereby posing a potential risk to
U.S. financial stability. The Council recognizes that economic growth
provides the strongest foundation for financial stability, and that
economic security, in turn, supports economic growth. The Council
understands economic security as our nation's ability to preserve
fiscal capacity, productive dynamism, and access to critical resources
and markets.
Second, under the Proposed Guidance, the Council would prioritize
its efforts to identify, assess, and respond to potential risks to U.S.
financial stability through a process that begins with an activities-
based approach. This approach generally reproduces the activities-based
approach introduced by the 2019 Interpretive Guidance. It is consistent
with the Council's priority of identifying potential risks to U.S.
financial stability on a system-wide basis. The Council would pursue
entity-specific determinations under section 113 of the Dodd-Frank Act
only if a potential risk to U.S. financial stability cannot be, or is
not, adequately addressed through an activities-based approach.
Third, under the Proposed Guidance, the Council would merge the
descriptions of its nonbank financial company designation process and
its analytic methodologies for financial stability risks into a single
document, reproducing the structure of the 2019 Interpretive Guidance.
If the Council issues final interpretive guidance based on the Proposed
Guidance, it intends to rescind the 2023 Analytic Framework.
Fourth, in the event the Council considers a nonbank financial
company for a potential determination under section 113, the Council
would perform a cost-benefit analysis prior to making a determination,
similar to the 2019 Interpretive Guidance. The Council would make a
determination under section 113 only if the expected benefits to
financial stability from Federal Reserve supervision and prudential
standards justify the expected costs that the determination would
impose. As part of an assessment of the benefits of a designation, the
Council would assess the likelihood of a nonbank financial company's
material financial distress, in order to evaluate the extent to which a
designation may promote U.S. financial stability, along with the extent
to which material financial distress at the nonbank financial company
could pose a threat to the financial stability of the United States.
This approach reproduces and clarifies the assessment of the likelihood
of a nonbank financial company's material financial distress introduced
by the 2019 Interpretive Guidance, which was eliminated in the 2023
Interpretive Guidance.
Fifth, the Council would add to the activities-based approach by
providing for the Council, in certain cases, to commence a process for
Council member agencies to act to address a potential risk to U.S.
financial stability. In these cases, the Council would notify an
existing financial regulatory agency in writing of the potential risk
to U.S. financial stability and would request a written response from
the agency within
[[Page 15553]]
a specified period regarding the actions the agency proposes to take to
address the potential risk.
Sixth, the Council would modify its interpretation of the term
``threat to the financial stability of the United States,'' for
purposes of section 113 of the Dodd-Frank Act,\9\ to mean, consistent
with its interpretation of the term in the 2019 Interpretive Guidance,
the threat of an impairment of financial intermediation or of financial
market functioning to a degree that would be sufficient to inflict
severe damage on the broader U.S. economy. This interpretation would
represent a higher threshold than the one set forth in the 2023
Analytic Framework, which interpreted this term to mean ``events or
conditions that could `substantially impair' the financial system's
ability to support economic activity.''
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\9\ Under section 113 of the Dodd-Frank Act, the Council may
determine, by a vote of not fewer than two-thirds of the voting
members of the Council then serving, including an affirmative vote
by the Chairperson of the Council, that a nonbank financial company
will be supervised by the Federal Reserve and be subject to
prudential standards if the Council determines that (1) material
financial distress at the nonbank financial company could pose a
threat to the financial stability of the United States or (2) the
nature, scope, size, scale, concentration, interconnectedness, or
mix of the activities of the nonbank financial company could pose a
threat to the financial stability of the United States. See Dodd-
Frank Act section 113(a)(1), 12 U.S.C. 5323(a)(1).
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Seventh, the Council would add a new procedural step to its
administrative process for nonbank financial company determinations.
Based on the Council's preliminary evaluation of a nonbank financial
company, the Proposed Guidance states that the Council intends to
identify steps a nonbank financial company or financial regulatory
agencies could take to address a potential threat to U.S. financial
stability.
The following sections outline the changes described above in
greater detail.
B. Changes to Analytic Methodologies
The Council would update its analytic methodologies, including a
new list of types of vulnerabilities that most commonly contribute to
potential risks to U.S. financial stability. These changes are intended
to improve the effectiveness of the Council's methodologies by making
them more analytically rigorous and transparent. The Council would
employ these analytic methodologies in both the designation and non-
designation contexts.
Under the Proposed Guidance, the Council would consider impediments
to economic growth and economic security when identifying potential
risks to U.S. financial stability. The Council would work with member
agencies to consider whether elements of the U.S. financial regulatory
framework are fit for purpose or impose undue burdens that could
constrain economic growth, thereby posing a potential risk to U.S.
financial stability. The Proposed Guidance notes that the Council may
also make recommendations in the Council's annual report, which is
required by the Dodd-Frank Act to include recommendations (1) to
enhance the integrity, efficiency, competitiveness, and stability of
U.S. financial markets; (2) to promote market discipline; and (3) to
maintain investor confidence. The Proposed Guidance explains that
economic security requires that the U.S. financial system reliably
provide the resources necessary to grow the real economy. It notes that
economic security and financial stability can both be bolstered by
encouraging technological innovation in the financial system and by
modernizing financial regulation to ensure it is efficient, effective,
and forward-looking.
In addition, the Council would add asset valuations to the list of
vulnerabilities that it would consider. The Proposed Guidance notes
that sharp reductions in the valuations of particular assets or classes
of assets can result in significant losses for financial market
participants that hold or are otherwise exposed to those assets, and
explains that this risk can be exacerbated by concentrated portfolios,
or mitigated by hedging or other risk-management strategies. The
Council would remove destabilizing activities, which appeared in the
2023 Analytic Framework, from the list of vulnerabilities that it would
consider. The Council proposes to remove destabilizing activities
because it believes that this vulnerability was not clearly defined and
relied on circular reasoning.
The Proposed Guidance further explains that complexity and opacity
of a market, activity, or firm can make it more difficult for
regulators, counterparties, and other stakeholders to assess potential
risks to U.S. financial stability, which may reduce the effectiveness
of market discipline. It states that risks may also be aggravated by
obstacles to the rapid and orderly resolution of market participants,
and it notes that a risk may be exacerbated if it is conducted without
effective risk-management practices, including the absence of
appropriate regulatory authority and requirements. In contrast, the
Proposed Guidance notes that existing regulatory requirements or market
practices may reduce risks by, for example, limiting exposures or
leverage, increasing capital and liquidity, enhancing risk-management
practices, restricting excessive risk-taking, providing consolidated
prudential regulation and supervision, or increasing regulatory or
public transparency; the Council would expect to take into account such
factors to the extent relevant in its analyses of potential risks to
U.S. financial stability.
Questions for Comment
1. What specific factors impacting economic growth and economic
security should the Council focus on in an effort to identify potential
risks to U.S. financial stability?
2. The Proposed Guidance adds asset valuations to the list of
vulnerabilities that the Council would consider when identifying and
assessing potential risks to U.S. financial stability, while removing
destabilizing activities, a vulnerability that appeared in the 2023
Analytic Framework. Are these changes appropriate, and should
additional modifications be made to the list of vulnerabilities that
the Council would consider?
C. Activities-Based Approach
The 2019 Interpretive Guidance stated that the Council will
prioritize its efforts to identify, assess, and address potential risks
and threats to U.S. financial stability through a process that begins
with an activities-based approach, and will pursue entity-specific
determinations under section 113 of the Dodd-Frank Act only if a
potential risk or threat cannot be, or is not, adequately addressed
through an activities-based approach. It stated further that the
Council anticipates it would consider a nonbank financial company for a
potential determination under section 113 only in rare instances, such
as if the products, activities, or practices of a company that pose a
potential threat to U.S. financial stability are outside the
jurisdiction or authority of financial regulatory agencies. The 2019
Interpretive Guidance stated that this approach reflects two
priorities: (1) identifying and addressing, in consultation with
relevant financial regulatory agencies, potential risks and emerging
threats on a system-wide basis and to reduce the potential for
competitive distortions among financial companies and in markets that
could arise from entity-specific determinations, and (2) allowing
relevant financial regulatory agencies, which generally possess greater
information and expertise with respect to company, product, and market
risks,
[[Page 15554]]
to address potential risks, rather than subjecting the companies to new
regulatory authorities.
The 2023 Interpretive Guidance, by contrast, eliminated the
statement in the 2019 Interpretive Guidance that the Council would use
an activities-based approach before considering a designation under
section 113. The preamble to the 2023 Interpretive Guidance stated that
the Council believed that rescinding the prioritization of an
activities-based approach will better enable the Council to respond to
threats to financial stability irrespective of their source.
The Proposed Guidance generally reproduces the activities-based
approach introduced by the 2019 Interpretive Guidance. The Council
believes that the prioritization of a process that begins with an
activities-based approach would enhance the analytical rigor of the
Council's activities and facilitate its efforts to consider impediments
to economic growth and economic security when identifying potential
risks to U.S. financial stability. The Proposed Guidance notes that the
Dodd-Frank Act gives the Council broad discretion in determining how to
respond to potential risks to U.S. financial stability. Under the
Proposed Guidance, the Council would prioritize its efforts to
identify, assess, and respond to potential risks to U.S. financial
stability through a process that begins with an activities-based
approach. The Council would pursue entity-specific determinations under
section 113 of the Dodd-Frank Act only if a potential risk to U.S.
financial stability cannot be, or is not, adequately addressed through
an activities-based approach.
The Proposed Guidance establishes a two-step process for the
Council's activities-based approach. In the first step, in an effort to
identify potential risks to U.S. financial stability, the Council
intends to monitor, consistent with its statutory purposes, diverse
financial markets and market developments on a system-wide basis, in
consultation with relevant financial regulatory agencies, to identify
products, activities, or practices that could pose risks to financial
stability.\10\ If the Council's monitoring of markets and market
developments identifies a potential risk to U.S. financial stability,
the Council would assess the potential risk to determine whether it
merits further review or action. The Proposed Guidance considers a
``risk to U.S. financial stability'' to mean the potential for an
event, act, or development that could impair financial intermediation
or financial market functioning to a degree that would be sufficient to
inflict significant damage on the broader U.S. economy. By referencing
an ``event, act, or development'' in the interpretation of ``risk to
U.S. financial stability,'' the Proposed Guidance seeks to clarify the
Council's understanding of the sources of potential risk to U.S.
financial stability, distinct from the vulnerabilities through which
such risks may propagate. Risks may arise not only from unintentional
events and economic and financial developments, but also from
deliberate actions by state or non-state actors that affect the
functioning of financial markets, institutions, or critical channels.
By identifying an ``event, act, or development'' as analytically
distinct sources of potential risk, the Proposed Guidance contemplates
the diverse types of origins of a risk to U.S. financial stability.
This distinction is intended to improve the Council's analytic
precision.
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\10\ The Council has a statutory duty to monitor the financial
services marketplace in order to identify potential threats to U.S.
financial stability. See Dodd-Frank Act section 112(a)(2)(C), 12
U.S.C. 5322(a)(2)(C).
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The Council's analysis in the first step of the activities-based
approach would generally focus on four framing questions, which
analyze: (1) what shocks or other developments could trigger the
potential risk to U.S. financial stability (for example, sharp
reductions in the valuation of particular classes of financial assets
or significant credit losses), and what vulnerabilities could be
implicated; (2) how adverse effects of the potential risk to U.S.
financial stability may be transmitted to financial markets or market
participants (for example, through direct or indirect exposures in
financial markets to the potential risk or funding or trading pressures
that may result from associated declines in asset prices); (3) the
effects the potential risk to U.S. financial stability could have on
the U.S. financial system (for example, the scale and magnitude of
adverse effects on other companies and markets, and whether such
effects could be concentrated or diffused among market participants);
and (4) whether the adverse effects of the potential risk to U.S.
financial stability could impair financial intermediation or financial
market functioning to a degree that would be sufficient to inflict
significant damage on the broader U.S. economy (for example, through
curtailed or interrupted provision of credit to non-financial
companies).
If the Council's analysis identifies a potential risk to U.S.
financial stability that merits action, the Council generally would
work with the relevant financial regulatory agencies at the federal and
state levels to respond to the potential risk.\11\ The Council would
coordinate among its members and member agencies and would follow up on
supervisory or regulatory actions to ensure the potential risk is
adequately addressed. The goal of this step is for existing regulators
to take appropriate action, such as modifying their regulation or
supervision of companies or markets under their jurisdiction in order
to mitigate potential risks to U.S. financial stability identified by
the Council. The Council would seek to take advantage of existing
regulators' expertise and regulatory authorities to address the
potential risk identified by the Council.
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\11\ The Council has a statutory duty to ``recommend to the
member agencies general supervisory priorities and principles
reflecting the outcome of discussions among the member agencies''
and to ``make recommendations to primary financial regulatory
agencies to apply new or heightened standards and safeguards for
financial activities or practices that could create or increase
risks of significant liquidity, credit, or other problems spreading
among bank holding companies, nonbank financial companies, and
United States financial markets.'' See Dodd-Frank Act section
112(a)(2)(F), (K), 12 U.S.C. 5322(a)(2)(F), (K).
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The Council anticipates that appropriate measures it may take to
address an identified potential risk would typically take the form of
relatively informal actions, such as information sharing among
regulators, but as deemed appropriate could also include more formal
measures, such as the proposed new process for Council member agencies
to act to address potential risks to U.S. financial stability described
in section G below, or the Council's public issuance of recommendations
to regulators or the public. Such recommendations could be made in the
Council's annual report, which includes the Council's recommendations
to enhance the integrity, efficiency, competitiveness, and stability of
U.S. financial markets, to promote market discipline, and to maintain
investor confidence.
The Council expects that much of its initial identification and
assessment of risks, and engagement with regulators, would be informal
and nonpublic in nature. The staffs of Council members and member
agencies would likely be responsible for much of the market monitoring,
risk identification, information sharing, and analysis in the
activities-based approach. This engagement may yield a range of diverse
outcomes, including the sharing of data, research, and analysis among
the Council and regulators, or the public
[[Page 15555]]
issuance of recommendations by the Council in its annual report.
Potential risks that merit further attention may be raised at meetings
of the Council members or with other stakeholders, and, as appropriate,
may result in public statements or recommendations by the Council, as
described above.
Questions for Comment
General Questions:
1. Does the Council's proposal described above to prioritize its
efforts to identify, assess, and address potential risks to U.S.
financial stability through a process that begins with an activities-
based approach, first introduced under the 2019 Interpretive Guidance,
enable the Council to achieve its statutory purposes? Should the
Council's proposed approach to the activities-based approach be
modified for other considerations?
2. When undertaking the activities-based approach, are there
specific categories of risks to U.S. financial stability that should be
examined by the Council, or specific macroeconomic considerations or
metrics that the Council should consider when assessing such risks?
3. Does the Council's approach under the 2023 Interpretive
Guidance, in which it stated that it would not prioritize an
activities-based approach but instead respond to a particular risk to
financial stability depending on the nature of the risk, better enable
the Council to respond to threats to U.S. financial stability than
prioritizing an activities-based approach as contemplated by the
Proposed Guidance?
Step One of the Activities-Based Approach: Identifying and
Assessing Potential Risks to U.S. Financial Stability:
1. What specific, consistent analyses should the Council perform to
monitor markets generally or specific types of markets?
2. Are the four framing questions described in the Proposed
Guidance for evaluating potential risks appropriate?
Step Two of the Activities-Based Approach: Working with Regulators
to Respond to Potential Risks to U.S. Financial Stability:
1. Should the Council make any changes to step two of the
activities-based approach, as described in the Proposed Guidance?
D. Consolidation of Interpretive Guidance and Analytic Methodologies
As noted above, the Proposed Guidance would merge the descriptions
of its nonbank financial company designation process and its analytic
methodologies for financial stability risks into a single document,
reproducing the structure of the 2019 Interpretive Guidance. The
Council believes that consolidating this information in a single
document is more administratively efficient and accessible to
stakeholders and the public. If the Council issues final interpretive
guidance based on the Proposed Guidance, it intends to rescind the 2023
Analytic Framework.
Questions for Comment
1. Will the consolidation of the Council's nonbank financial
company designation guidance and analytic methodologies in a single
document create a more efficient and accessible document?
E. Cost-Benefit Analysis
The 2019 Interpretive Guidance stated that determining whether the
expected benefits of a potential Council determination justify the
expected costs is necessary to ensure that the Council's actions are
expected to provide a net benefit to U.S. financial stability and are
consistent with thoughtful decision-making. It stated further that the
Council will make a determination under section 113 only if the
expected benefits to financial stability from Federal Reserve
supervision and prudential standards justify the expected costs that
the determination would impose. The 2023 Interpretive Guidance, by
contrast, eliminated the commitment to conduct a cost-benefit analysis.
The Council believes that rigorous cost-benefit analysis is an
important element of thoughtful decision-making. The Proposed Guidance
therefore generally reproduces the cost-benefit analysis introduced by
the 2019 Interpretive Guidance. Under the Proposed Guidance, the
Council would perform a cost-benefit analysis before making any
designation under section 113. The Council proposes to make a
designation under section 113 only if the expected benefits justify the
expected costs that the determination would impose. The Council would
quantify reasonably estimable benefits and costs (using ranges, as
appropriate), and would also consider non-quantified benefits and
costs, in assessing the net benefits and costs of a designation. The
Council would conduct this analysis in cases where the Council is
concluding that the company meets one of the standards for a
determination by the Council under section 113 of the Dodd-Frank Act.
Under the Proposed Guidance, the Council would consider the
benefits of a designation to the U.S. financial system, long-term
economic growth, economic security, and the nonbank financial company.
When evaluating potential benefits to the U.S. financial system and the
U.S. economy arising from a designation, the Council may consider
whether the designation enhances financial stability and improves the
functioning of markets by reducing the likelihood or severity of a
potential financial crisis, among other factors.
Under the Proposed Guidance, when evaluating the costs of a
designation, the Council would consider not only the cost to the
nonbank financial company from anticipated new or increased regulatory
requirements in connection with a designation, but also costs to the
U.S. economy, including potential impacts on economic growth and
economic security. When evaluating such costs, the Council will
consider both cumulative and marginal costs to the nonbank financial
company and to the U.S. economy. Relevant costs to the company could
include costs related to risk-management requirements, supervision and
examination, and liquidity requirements, and potentially higher capital
costs or a negative impact on the company's ability to innovate. When
evaluating the costs of a determination to the U.S. economy, the
Council would assess the impact of the determination on the
availability and cost of credit or financial products in relevant U.S.
markets, among other factors.
Questions for Comment
1. Is the proposed framework for assessing the benefits and costs
of a potential determination appropriate? How should the Council assess
benefits and costs that are difficult to monetize or quantify?
2. Should the Council consider other benefits or costs than those
proposed in section IV of the Proposed Guidance?
3. How should the Council estimate the costs of any new regulatory
requirements that would result from the Council's designation? What
sources should the Council rely upon when estimating such costs?
4. Should the Council consider additional factors when considering
the benefits or costs of a designation to the U.S. economy?
5. Should the Council consider any additional benefits to the
company subject to a designation, or additional benefits to the U.S.
financial system and the U.S. economy arising from a Council
designation other than those listed in section IV of the Proposed
Guidance? How should the Council quantify any
[[Page 15556]]
such benefits? What sources should the Council rely upon when
estimating such benefits?
6. How should the Council address uncertainty (for example, using
alternate baselines or sensitivity analyses)?
7. Are there additional approaches the Council should consider when
measuring potential threats to U.S. financial stability in order to
assess any improvement in financial stability following a
determination?
F. Likelihood of Material Financial Distress
The 2019 Interpretive Guidance stated that as part of the
assessment of the benefits of a Council determination for any company
under review under the First Determination Standard (as defined below),
the Council will assess the likelihood of the company's material
financial distress. It stated that this assessment may rely upon
historical examples regarding the characteristics of financial
companies that have experienced financial distress, but may also
consider other risks that do not have historical precedent. The 2023
Interpretive Guidance, however, removed this ``likelihood assessment''
from the Council's designation procedures.
The Proposed Guidance reproduces the assessment of the likelihood
of a nonbank financial company's material financial distress introduced
by the 2019 Interpretive Guidance. The Council would therefore assess
the likelihood of a company's material financial distress, applying
qualitative and quantitative factors, when evaluating the impact of a
Council designation for any company under review under the First
Determination Standard. To assess the risk of material financial
distress, the Council may consider a range of factors, including
market-based measures (e.g., distance-to-default measures), accounting-
based measures (e.g., statistical models using capital adequacy), and
market- and accounting-based measures (e.g., academic models). The
Council's analysis of the likelihood of a nonbank financial company's
material financial distress would be conducted taking into account a
period of overall stress in the financial services industry and a weak
macroeconomic environment. When possible, the Council would attempt to
quantify the likelihood of material financial distress; as an
alternative, when doing so is not possible with respect to a specific
firm, the Council would generally consider quantitative and qualitative
factors related to the types of market-based or accounting-based
measures noted above, and historical examples regarding the
characteristics of financial companies that have experienced financial
distress. The Council would consult with the company's primary
financial regulatory agency (if any) when assessing the company,
including regarding the company's resolvability, complexity, and the
likelihood of its material financial distress.
The Proposed Guidance also clarifies that in light of the
unpredictability of the failure of financial companies, the Council
would not seek to determine that a nonbank financial company's material
financial distress is reasonably likely, but instead would use this
analysis to evaluate the factors that could cause such distress as part
of the assessment of benefits of a designation.
Questions for Comment
1. Is the proposed framework for assessing the likelihood of
material financial distress, as part of an assessment of the benefits
of a designation, appropriate?
2. What metrics or factors should the Council consider when
attempting to quantify the likelihood of a company's material financial
distress? If such quantification is not possible with respect to a
specific company, what additional factors should the Council consider?
What are the appropriate methodologies or models (including appropriate
time horizons and assumptions) to assess the likelihood of a nonbank
financial company's material financial distress?
3. After the Council assesses the likelihood of a company's
material financial distress, what should be the threshold for the
Council taking further action regarding a potential determination with
respect to the company?
G. Process for Member Agencies To Address Potential Risks
Under the Proposed Guidance, the Council would add to the
activities-based approach by providing for the Council, in certain
cases, to commence a process for Council member agencies to act to
address a potential risk to U.S. financial stability. In these cases,
the Council would notify an existing financial regulatory agency in
writing of the potential risk to U.S. financial stability and would
request a written response from the agency within a specified period
regarding the actions the agency proposes to take to address the
potential risk. The agency would be expected to provide detailed
information to the Council regarding its proposed actions, their
anticipated effects, and the expected timeline for implementation.
While the Council may determine to undertake this new procedure before
exercising its authority under section 120,\12\ the two approaches are
not necessarily sequential, and the Council could determine to
undertake either or both in any order.
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\12\ Under section 120, the Council has authority to ``provide
for more stringent regulation of a financial activity'' by publicly
issuing nonbinding recommendations to primary financial regulatory
agencies to apply new or heightened standards and safeguards for a
financial activity or practice conducted by certain financial
companies. See Dodd-Frank Act section 120, 12 U.S.C. 5330.
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Question for Comment
1. Will the proposed new process described above for making
recommendations to agencies enable the Council to respond to potential
risks to U.S. financial stability in a timely and effective manner?
H. Interpretation of Threat to Financial Stability
Under the Proposed Guidance, the Council would modify its
interpretation of the term ``threat to the financial stability of the
United States,'' a term used in the Dodd-Frank Act but not defined in
the statute. The 2023 Analytic Framework interpreted this term to mean
``events or conditions that could `substantially impair' the financial
system's ability to support economic activity.'' For purposes of
section 113 of the Dodd-Frank Act, the Council would consider a
``threat to the financial stability of the United States'' to mean,
consistent with its interpretation of the term in the 2019 Interpretive
Guidance, the threat of an impairment of financial intermediation or of
financial market functioning to a degree that would be sufficient to
inflict severe damage on the broader U.S. economy. This proposed
interpretation would represent a higher threshold than the one
established in the 2023 Analytic Framework. The Council believes that
this is the appropriate threshold for any potential use of the
Council's designation authority, given the number of other authorities
and tools available to the Council to respond to potential risks to
U.S. financial stability, including the activities-based approach
described above.
Question for Comment
1. The Proposed Guidance defines ``threat to the financial
stability of the United States'' to mean the threat of an impairment of
financial intermediation or of financial market functioning to a degree
that would be sufficient to inflict severe damage on the broader U.S.
economy. Is this an appropriate
[[Page 15557]]
definition of a ``threat to the financial stability of the United
States''? What criteria or metrics should the Council consider when
evaluating whether a threat is sufficient to inflict ``severe'' damage
on the broader U.S. economy?
I. Administrative Process for Nonbank Financial Company Determinations
With respect to the Council's procedures for nonbank financial
company designations and annual reevaluations of designations, the
Proposed Guidance would generally remain consistent with the procedures
included in the 2019 Interpretive Guidance and the 2023 Interpretive
Guidance. Among other things, the Proposed Guidance continues to
provide for significant engagement and communication between the
Council and a nonbank financial company under review for potential
designation, and with the company's primary financial regulatory agency
or home-country supervisor. In addition to these existing features, the
Council would add a new procedural step to its administrative process
for nonbank financial company determinations. Based on the Council's
preliminary evaluation of a nonbank financial company, the Proposed
Guidance states that the Council intends to identify steps a nonbank
financial company or financial regulatory agencies could take to
address a potential threat to U.S. financial stability. Subject to any
necessary administrative procedures required to remediate the risk, the
Council generally expects material risks to U.S. financial stability to
be addressed within 180 days. The Council believes that under these
procedures, the designation process would be rigorous and
transparent.\13\
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\13\ In accordance with the Council's bylaws, the Council may
delegate authority, including to its Deputies Committee, to
implement and take any actions under the guidance, except with
respect to actions that are expressly nondelegable under the Dodd-
Frank Act, the Council's bylaws, or the guidance.
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Questions for Comment
1. Will the new procedural step proposed to be added to the
Council's administrative process for nonbank financial company
determinations provide a nonbank financial company or financial
regulatory agencies sufficient opportunity to undertake steps to
address a potential threat to U.S. financial stability?
2. Would any other changes to the designation process be
appropriate in helping the Council satisfy its statutory requirements?
3. Should any aspect of the Proposed Guidance described in this
section II be modified for other considerations?
III. Legal Authority of Council and Status of Proposed Guidance
The Council has numerous authorities and tools under the Dodd-Frank
Act to carry out its statutory purposes.\14\ The Council expects that
its response to any potential risk or threat to U.S. financial
stability would be based on an assessment of the circumstances. As the
agency charged by Congress with broad-ranging responsibilities under
sections 112 and 113 of the Dodd-Frank Act, the Council has the
inherent authority to promulgate interpretive guidance under those
provisions that explains and interprets the steps the Council will take
when undertaking the determination process.\15\ The Council also has
authority to issue procedural rules \16\ and policy statements.\17\ The
Proposed Guidance provides transparency to the public as to how the
Council intends to exercise its statutory grant of discretionary
authority. Except to the extent that the Proposed Guidance sets forth
rules of agency organization, procedure, or practice, the Council has
concluded that the Proposed Guidance does not have binding effect; does
not impose duties on, or alter the rights or interests of, any person;
does not change the statutory standards for the Council's decision
making; and does not relieve the Council of the need to make entity-
specific determinations in accordance with section 113 of the Dodd-
Frank Act. The Proposed Guidance also does not limit the ability of the
Council to take emergency action under section 113(f) of the Dodd-Frank
Act if the Council determines that such action is necessary or
appropriate to prevent or mitigate threats posed by a nonbank financial
company to U.S. financial stability. As a result, the Council has
concluded that the notice and comment requirements of the
Administrative Procedure Act would not apply.\18\ However, under the
Council's rule in 12 CFR 1310.3, the Council voluntarily committed that
it would not amend or rescind Appendix A to part 1310 without providing
the public with notice and an opportunity to comment in accordance with
the procedures applicable to legislative rules under 5 U.S.C. 553.\19\
The Council invites interested persons to submit comments regarding the
Proposed Guidance.
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\14\ See, for example, Dodd-Frank Act sections 112(a)(2), 113,
115, 120, 804, 12 U.S.C. 5322(a)(2), 5323, 5325, 5330, 5463.
\15\ Courts have recognized that ``an agency charged with a duty
to enforce or administer a statute has inherent authority to issue
interpretive rules informing the public of the procedures and
standards it intends to apply in exercising its discretion.'' See,
for example, Production Tool v. Employment & Training
Administration, 688 F.2d 1161, 1166 (7th Cir. 1982). The Supreme
Court has acknowledged that ``whether or not they enjoy any express
delegation of authority on a particular question, agencies charged
with applying a statute necessarily make all sorts of interpretive
choices.'' See U.S. v. Mead, 533 U.S. 218, 227 (2001).
\16\ See Dodd-Frank Act section 111(e)(2), 12 U.S.C. 5321(e)(2).
\17\ See Association of Flight Attendants-CWA, AFL-CIO v.
Huerta, 785 F.3d 710 (D.C. Cir. 2015).
\18\ See 5 U.S.C. 553(b)(A); 12 CFR 1310.3.
\19\ Section 1310.3 does not apply to the Council's issuance of
rules, guidance, procedures, or other documents that do not amend or
rescind Appendix A. Thus, other Council materials, and documents
that are referred to in but are not a part of the Proposed Guidance,
such as the Council's separately issued 2023 Analytic Framework,
hearing procedures, bylaws, and committee charters, are not subject
to section 1310.3's requirements.
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IV. Paperwork Reduction Act
The Proposed Guidance is not expected to alter the collections of
information previously reviewed and approved by the Office of
Management and Budget in accordance with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)) under control number 1505-0244. Nonetheless,
the Council provides the estimated burdens of the information
collections associated with the Proposed Guidance and invites comments
below. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a valid control number assigned by the Office of Management and Budget.
The collection of information under the Proposed Guidance is found
in 12 CFR 1310.20-23.
The hours and costs associated with preparing data, information,
and reports for submission to the Council constitute reporting and cost
burdens imposed by the collection of information. The estimated total
annual reporting burden associated with the collection of information
in the Proposed Guidance is 20 hours, based on an estimate of 1
respondent.
In addition, in determining this estimate, the Council considered
its obligation under 12 CFR 1310.20(b) to, whenever possible, rely on
information available from the Office of Financial Research or any
Council member agency or primary financial regulatory agency that
regulates a nonbank financial company before requiring the submission
of reports from such nonbank financial company. The Council expects
that its collection of information under the Proposed Guidance would be
performed in a manner that attempts to minimize
[[Page 15558]]
burdens for affected financial companies. The aggregate burden will be
subject to the number of financial companies that are evaluated in the
determination process, the extent of information regarding such
companies that is available to the Council through existing public and
regulatory sources, and the amount and types of information that
financial companies provide to the Council.
Interested persons are invited to submit comments regarding the
estimates provided in this section. Comments on the collection of
information should be sent to the Office of Management and Budget,
Attn: Desk Officer for the Financial Stability Oversight Council,
Office of Information and Regulatory Affairs, Washington, DC 20503,
with copies to Dennis Lee, Department of the Treasury, Washington, DC
20220. Comments on the collection of information must be received by
May 14, 2026.
Comments are specifically requested concerning:
1. Whether the proposed collection of information is necessary for
the proper performance of the functions of the Council, including
whether the information will have practical utility;
2. The accuracy of the estimated burden associated with the
proposed collection of information;
3. How the quality, utility, and clarity of information to be
collected may be enhanced;
4. How the burden of complying with the proposed collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
5. Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
V. Executive Orders 12866, 13563, and 14192
Executive Orders 12866 and 13563 direct certain agencies to assess
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). Pursuant
to section 3(f) of Executive Order 12866, the Office of Information and
Regulatory Affairs within the Office of Management and Budget has
determined that the Proposed Guidance is a ``significant regulatory
action.'' Accordingly, the Proposed Guidance has been reviewed by the
Office of Management and Budget. The Proposed Guidance is anticipated
to be a deregulatory action under Executive Order 14192.
A. Baseline for Economic Analysis Under Executive Orders 12866 and
13563
This economic analysis, undertaken in response to Executive Orders
12866 and 13563, addresses the incremental economic rationale for
certain key changes discussed in the Proposed Guidance, as compared to
the 2023 Interpretive Guidance and 2023 Analytic Framework.
As discussed in section II above, the Proposed Guidance would help
ensure that the Council's work is clear, transparent, and analytically
rigorous, and enhance the Council's engagement with companies,
regulators, and other stakeholders. By issuing clear and transparent
guidance, the Council seeks to provide the public with sufficient
information to understand the Council's concerns regarding risks to
U.S. financial stability, while appropriately protecting information
submitted by companies and regulators to the Council.
B. Economic Analysis of Certain Proposed Changes
1. Changes to Analytic Methodologies
Section II.B. above discusses how the Council proposes to update
its analytic methodologies, including by considering impediments to
economic growth and economic security when identifying potential risks
to U.S. financial stability. By proposing to update its analytic
methodologies, the Council intends to more effectively implement the
goals of financial stability policy, which seeks to reduce the
probability and severity of disruptions that can impose large costs on
households and businesses, while also recognizing that overly
burdensome interventions can impair intermediation, raise the cost of
credit, or reduce the availability of financial products. The Proposed
Guidance, by proposing a more explicit consideration of these factors,
seeks to facilitate a balanced analysis of tradeoffs, and reduce the
risk that interventions create fragility by constraining the system's
capacity to provide key financial services.
2. Activities-Based Approach
Section II.C. above discusses how the Council would prioritize its
efforts to identify, assess, and respond to potential risks to U.S.
financial stability through a process that begins with an activities-
based approach. The Council believes that this change would improve its
ability to respond to such risks when they arise from a systemic
externality, in which the private incentives of market participants do
not fully account for spillovers to the broader financial system and
real economy. An activities-based approach is better positioned to
address risks that arise across multiple firms engaging in similar
practices, which can reduce risk migration from more to less regulated
sectors of the economy and support more uniform application of
safeguards to comparable activity.
In addition, the Council believes that an activities-based approach
can mitigate competitive distortions by reducing disparate regulatory
burdens across firms engaged in comparable activity, particularly where
firms offer substitutable products or services. Where similarly
situated entities face materially different expected regulatory burdens
solely because one firm is evaluated for designation and another is
not, market shares and pricing may shift for reasons unrelated to
efficiency or product quality. The Council believes that prioritizing
system-wide engagement with relevant regulators can help mitigate such
distortions and promote efficient risk management by more effectively
aligning incentives. A key tradeoff is that, if efforts to address a
potential risk would involve coordination among multiple agencies,
prioritizing an activities-based approach may be less targeted than an
entity-specific approach. Under the Proposed Guidance, the Council
would maintain the ability to evaluate a nonbank financial company for
potential designation in the event that a potential risk or threat to
U.S. financial stability is not adequately addressed through an
activities-based approach.
3. Cost-Benefit Analysis and Likelihood of Material Financial Distress
Section II.E. above discusses how the Council would perform a cost-
benefit analysis before making any designation under section 113. The
Council proposes to make a designation under section 113 only if the
expected benefits justify the expected costs that the determination
would impose, with the goal of avoiding the imposition of unnecessary
costs in circumstances where an activities-based approach or other
Council tool could adequately address a potential risk.
Section II.F. above discusses how the Council would assess the
likelihood of a company's material financial distress, applying
qualitative and quantitative factors, when evaluating the impact of a
Council designation for any company
[[Page 15559]]
under review under the First Determination Standard. This assessment
would improve the accuracy of the designation review process by
enabling the Council to better distinguish between scenarios where
distress is a plausible pathway for systemic transmission and scenarios
where distress is highly remote. At the same time, the Council
recognizes that financial crises can arise from combinations of shocks
and vulnerabilities without clear historical analogues. By assessing
the likelihood of a company's material financial distress, the Council
seeks to avoid both over-designation, which can impose costs where
benefits are speculative, and under-designation, which can result in a
failure to act where probability-weighted harms are substantial.
4. Process for Member Agencies To Address Potential Risks
Section II.G. above discusses how the Council would add to the
activities-based approach by providing for the Council, in certain
cases, to commence a process for Council member agencies to act to
address a potential risk to U.S. financial stability. This proposal is
intended to mitigate coordination and collective-action problems that
could arise when potential risks span the regulatory jurisdictions of
multiple agencies. This structured mechanism is intended to improve the
ability of Council member agencies to quickly and efficiently address
potential risks, which may reduce the likelihood of more intrusive
interventions and the associated higher compliance costs.
5. Interpretation of Threat to Financial Stability
Section II.H. above discusses how the Council would modify its
interpretation of the term ``threat to the financial stability of the
United States,'' for purposes of section 113 of the Dodd-Frank Act, to
mean the threat of an impairment of financial intermediation or of
financial market functioning to a degree that would be sufficient to
inflict severe damage on the broader U.S. economy. This interpretation
would represent a higher threshold than the one set forth in the 2023
Analytic Framework. By raising the threshold for its interpretation of
this term, the Council seeks to focus its designation evaluation on
situations where the magnitude of potential economic harm is greatest
and where the marginal value of applying Federal Reserve supervision
and prudential standards is expected to be highest. This proposal is
intended to reduce the likelihood that the Council undertakes
designation, and imposes related costs, in circumstances where the
benefits are uncertain or limited.
6. Administrative Process for Nonbank Financial Company Determinations
Section II.I. above discusses how the Council would add a new
procedural step to its administrative process for nonbank financial
company determinations. Based on the Council's preliminary evaluation
of a nonbank financial company, the Proposed Guidance states that the
Council intends to identify steps a nonbank financial company or
financial regulatory agencies could take to address a potential threat
to U.S. financial stability. By identifying targeted remediation steps
at a preliminary stage, the Council seeks to address potential threats
without incurring the potentially greater compliance costs and market
impacts associated with designation. This proposal may also reduce the
potential for market overreaction and lead to less costly pricing of
uncertainty. At the same time, the proposal could increase costs if the
nonbank financial company does not fully implement remediation steps or
if regulatory or administrative actions take longer than anticipated.
The Council may take additional steps to address a potential threat to
U.S. financial stability if it is not adequately addressed through this
proposed procedural step.
C. Alternatives Considered
An alternative to the Proposed Guidance would be to maintain the
2023 Interpretive Guidance and 2023 Analytic Framework. As compared to
this alternative, the Proposed Guidance emphasizes system-wide
mitigation, improved analytical rigor, and more transparent
methodologies and procedural steps that are intended to improve
predictability and reduce unnecessary costs, while maintaining the
ability of the Council to take additional actions in the event that a
potential risk or threat is not adequately addressed.
D. Benefits, Costs, and Uncertainty
The principal anticipated economic benefit of the Proposed Guidance
relative to the 2023 Interpretive Guidance and 2023 Analytic Framework
is a reduction in the likelihood or severity of financial instability
by improving how the Council would identify, prioritize, and address
potential risks. The proposal aims to increase the probability that
system-wide vulnerabilities are mitigated through appropriately
tailored actions; reduce distortions associated with entity-specific
actions in circumstances where an activities-based approach would be
sufficient; and improve the rigor, transparency, and predictability of
any decision to use the Council's designation authority.
The principal anticipated economic cost of the Proposed Guidance
relative to the 2023 Interpretive Guidance and 2023 Analytic Framework
is that prioritizing an activities-based approach and performing a
cost-benefit analysis may delay efforts to address a potential threat
to U.S. financial stability that could be addressed more effectively by
the designation of a nonbank financial company. A further anticipated
economic cost is the additional uncertainty for market participants
that may be associated with a change by the Council to its approach to
identify and address potential risks to U.S. financial stability.
The Proposed Guidance involves uncertainty arising from the fact
that financial stability policy is difficult to quantify because it
depends on low-frequency tail events, endogenous behavioral responses,
and evolving market structure, among other unpredictable factors.
Considering this analysis, the Council believes that the
anticipated economic benefits of the Proposed Guidance would justify
the anticipated economic costs.
List of Subjects in 12 CFR Part 1310
Brokers, Investments, Securities.
The Financial Stability Oversight Council proposes to amend 12 CFR
part 1310 as follows:
PART 1310--AUTHORITY TO REQUIRE SUPERVISION AND REGULATION OF
CERTAIN NONBANK FINANCIAL COMPANIES
0
1. The authority citation for part 1310 continues to read as follows:
Authority: 12 U.S.C. 5321; 12 U.S.C. 5322; 12 U.S.C. 5323.
Appendix A to 12 CFR Part 1310--Financial Stability Oversight Council
Guidance for Nonbank Financial Company Determinations
Introduction
This document describes the approach the Financial Stability
Oversight Council (the ``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,
[[Page 15560]]
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.\1\ The Council's specific
statutory duties include monitoring the financial services
marketplace in order to identify potential threats to U.S. financial
stability, identifying gaps in regulation that could pose risks to
U.S. financial stability, and recommending to the Council member
agencies general supervisory priorities and principles.\2\
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\1\ Dodd-Frank Act Wall Street Reform and Consumer Protection
Act (``Dodd-Frank Act'') section 112(a)(1), 12 U.S.C. 5322(a)(1).
\2\ Dodd-Frank Act section 112(a)(2), 12 U.S.C. 5322(a)(2).
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Section II of this document describes the Council's analytic
approach for identifying and assessing potential risks to U.S.
financial stability. Section III describes the approach the Council
intends to take in prioritizing its work to identify and respond to
potential risks to U.S. financial stability using an activities-
based approach, reflecting the Council's priority of identifying
potential risks to U.S. financial stability on a system-wide basis.
Section IV outlines the Council's approach when determining whether
to subject a nonbank financial company to Federal Reserve
supervision and prudential standards under section 113 of the Dodd-
Frank Act.
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 to U.S. financial stability on a case-by-case
basis, subject to applicable statutory requirements. If the Council
were to depart from the process set forth in this document, it would
need to provide a reasoned explanation for its action, which would
require acknowledging the change in position.\3\
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\3\ See FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515
(2009).
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II. Analytic Methodologies for Identifying and Assessing Potential
Risks to U.S. Financial Stability
The Council considers a risk to U.S. financial stability to mean
the potential for an event, act, or development that could impair
financial intermediation or financial market functioning to a degree
that would be sufficient to inflict significant damage on the
broader U.S. economy. A risk to U.S. financial stability arises when
an event, act, or development interacts with or exploits a
vulnerability to transmit stress or dislocations through the
financial system. This may take the form of a ``shock,'' which is an
event, act, or development--arising from within the financial system
or from external sources--the impact of which could impair financial
intermediation or financial market functioning. Examples of shocks
include a sudden fall in asset prices or market liquidity, or the
failure of one or more financial companies that provide critical
services to the financial sector. A ``vulnerability'' in the
financial system is a characteristic that can amplify the negative
impact of a shock. Conversely, the Council considers financial
stability to mean the financial system being resilient to risks to
U.S. financial stability. To accomplish its statutory purposes and
duties, the Council seeks to mitigate vulnerabilities that may
increase risks to U.S. financial stability.
Economic growth and economic security are important
considerations related to financial stability. The Council works
with member agencies to consider whether elements of the U.S.
financial regulatory framework are fit for purpose or impose undue
burdens that could constrain economic growth, thereby posing a
potential risk to U.S. financial stability. Similarly, economic
security requires that the U.S. financial system reliably provide
the resources necessary to grow the real economy. Thus, economic
security and financial stability can both be bolstered by
encouraging technological innovation in the financial system and by
modernizing financial regulation to ensure it is efficient,
effective, and forward-looking.
The evaluation of any potential risk to U.S. financial stability
will be highly fact-specific, but the Council has identified certain
vulnerabilities that most commonly contribute to such risks. The
mere presence of any single vulnerability does not indicate that a
risk to U.S. financial stability exists; the Council's analyses will
take into account the risk associated with one or more
vulnerabilities in the financial system.
<bullet> Leverage. Leverage can amplify risks by reducing market
participants' ability to satisfy their obligations and by increasing
the potential for sudden liquidity strains. Leverage can arise from
debt, derivatives, off-balance sheet obligations, and other
arrangements. Leverage can arise broadly within a market or at a
limited number of firms in a market.
<bullet> Liquidity risk and maturity mismatch. A shortfall of
sufficient liquidity to satisfy short-term needs, or reliance on
short-term liabilities to finance longer-term assets, can subject
market participants to rollover or refinancing risk. These risks may
force entities to sell assets rapidly at stressed market prices,
which can contribute to broader stresses.
<bullet> Asset valuations. Sharp reductions in the valuation of
particular assets or classes of assets can result in significant
losses for financial market participants that hold or are otherwise
exposed to those assets. This risk can be exacerbated by
concentrated portfolios, or mitigated by hedging or other risk-
management strategies.
<bullet> Interconnections. Direct or indirect financial
interconnections, such as exposures of creditors, counterparties,
investors, and borrowers, can increase the potential negative effect
of dislocations or financial distress.
<bullet> Operational risks. Risks can arise from the impairment
or failure of financial market infrastructures, processes, or
systems, including due to cybersecurity vulnerabilities.
<bullet> Concentration. A risk may be amplified if financial
exposures or important services are highly concentrated in a small
number of entities, creating a risk of widespread losses or the risk
that the service could not be replaced in a timely manner at a
similar price and volume if existing providers withdrew from the
market.
<bullet> Impediments to economic growth and economic security.
Economic growth and economic security are important considerations
related to financial stability. Circumstances or developments that
negatively impact economic growth or economic security could
undermine financial stability.
In addition, complexity and opacity of a market, activity, or
firm can make it more difficult for regulators, counterparties, and
other stakeholders to assess potential risks to U.S. financial
stability, which may reduce the effectiveness of market discipline.
Risks may also be aggravated by obstacles to the rapid and orderly
resolution of market participants. In addition, a risk may be
exacerbated if it is conducted without effective risk-management
practices, including the absence of appropriate regulatory authority
and requirements. In contrast, existing regulatory requirements or
market practices may reduce risks by, for example, limiting
exposures or leverage, increasing capital and liquidity, enhancing
risk-management practices, restricting excessive risk-taking,
providing consolidated prudential regulation and supervision, or
increasing regulatory or public transparency.
The Council considers how the adverse effects of a potential
risk to U.S. financial stability could be transmitted to financial
markets or market participants and what impact the potential risk
could have on the financial system. Such a transmission of risk can
occur through various mechanisms, or ``channels.'' The Council has
identified four transmission channels that could facilitate the
transmission of the negative effects of a risk to U.S. financial
stability. These transmission channels are:
<bullet> Exposure transmission channel. Direct and indirect
exposures of creditors, counterparties, investors, and other market
participants can result in losses in the event of a default or
decreases in asset valuations. In particular, market participants'
exposures to a particular financial instrument or asset class, such
as equity, debt, derivatives, or securities financing transactions,
could impair those market participants if there is a default on or
other reduction in the value of the instrument or assets. In
evaluating this transmission channel, risks arising from exposures
to assets managed by a company on behalf of third parties are
distinct from exposures to assets owned by, or liabilities issued
by, the company itself. The potential risk to U.S. financial
stability will generally be greater if the amounts of exposures are
larger; if transaction terms provide less protection for
counterparties; if exposures are correlated, concentrated, or
interconnected with other instruments or asset classes; or if
entities with significant exposures include large financial
institutions. The leverage, interconnections, and concentration
vulnerabilities described above may be
[[Page 15561]]
particularly relevant to this transmission channel.
<bullet> Asset liquidation transmission channel. A rapid
liquidation of financial assets can pose a risk to U.S. financial
stability when it causes a significant decrease in asset prices that
disrupts trading or funding in key markets or causes losses or
funding problems for market participants holding those or related
assets. Rapid liquidations can result from a deterioration in asset
prices or market functioning that could pressure firms to sell their
holdings of affected assets to maintain adequate capital and
liquidity, which, in turn, could produce a cycle of asset sales that
lead to further market disruptions. This analysis takes into account
amounts and types of liabilities that are or could become short-term
in nature, amounts of assets that could be rapidly liquidated to
satisfy obligations, and the potential effects of a rapid asset
liquidation on markets and market participants. The potential risk
is greater, for example, if leverage or reliance on short-term
funding is higher, if assets are riskier and may experience a
reduction in market liquidity in times of broader market stress, and
if asset price volatility could lead to significant margin calls.
Actions that market participants or financial regulators may take to
impose stays on counterparty terminations or withdrawals may reduce
the risks of rapid asset liquidations, although such actions could
potentially increase risks through the exposures transmission
channel if they result in potential losses or delayed payments or
through the contagion transmission channel if there is a loss of
market confidence. The leverage and liquidity risk and maturity
mismatch vulnerabilities described above may be particularly
relevant to this transmission channel.
<bullet> Critical function or service transmission channel. A
risk to financial stability can arise if there could be a disruption
of a critical function or service that is relied upon by market
participants and for which there are no ready substitutes that could
provide the function or service at a similar price and quantity.
This channel is commonly referred to as ``substitutability.''
Substitutability risks can arise in situations where a small number
of entities are the primary or dominant providers of critical
services in a market that the Council determines to be essential to
U.S. financial stability. Concern about a potential lack of
substitutability could be greater if providers of a critical
function or service are likely to experience stress at the same time
because they are exposed to the same risks. This channel is more
prominent when the critical function or service is interconnected or
large, when operations are opaque, when the function or service uses
or relies on leverage to support its activities, or when risk-
management practices related to operational risks are not
sufficient. The interconnections, operational risks, and
concentration vulnerabilities described above may be particularly
relevant to this transmission channel.
<bullet> Contagion transmission channel. Even without direct or
indirect exposures, contagion can arise from the perception of
common vulnerabilities or exposures, such as business models or
asset holdings that are similar or highly correlated. Such contagion
can spread stress quickly and unexpectedly, particularly in
circumstances where there is limited transparency into investment
risks, correlated markets, or greater operational risks. Contagion
can also arise when there is a loss of confidence in financial
instruments that are treated as substitutes for money. In these
circumstances, market dislocations or fire sales may result in a
loss of confidence in other financial market sectors or
participants, propagating further market dislocations or fire sales.
The interconnections and complexity or opacity vulnerabilities
described above may be particularly relevant to this transmission
channel.
The Council may consider these vulnerabilities and transmission
channels, as well as others that may be relevant, in identifying
financial markets, activities, and entities that could pose risks to
U.S. financial stability.
The Council may assess potential risks to U.S. financial
stability as they could arise in the context of a period of overall
stress in the financial services industry and in a weak
macroeconomic environment.
Activities-Based Approach
The Dodd-Frank Act gives the Council broad discretion in
determining how to respond to potential risks to U.S. financial
stability. A determination to subject a nonbank financial company to
Federal Reserve supervision and prudential standards under section
113 of the Dodd-Frank Act is only one of several Council authorities
for responding to potential risks to U.S. financial stability.\4\
The Council will prioritize its efforts to identify, assess, and
respond to potential risks to U.S. financial stability through a
process that begins with an activities-based approach, applying the
analytic methodologies described above, and will pursue entity-
specific determinations under section 113 of the Dodd-Frank Act only
if a potential risk to U.S. financial stability cannot be, or is
not, adequately addressed through an activities-based approach. The
Council's activities-based approach is intended to identify and
respond to risks to U.S. financial stability using a two-step
approach, described below.
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\4\ For example, the Council has authority to make
recommendations to the Federal Reserve concerning the establishment
and refinement of prudential standards and reporting and disclosure
requirements applicable to nonbank financial companies supervised by
the Federal Reserve; make recommendations to primary financial
regulatory agencies to apply new or heightened standards and
safeguards for a financial activity or practice conducted by certain
financial companies if the Council determines that such activity or
practice could create or increase certain risks; and designate
financial market utilities and payment, clearing, and settlement
activities that the Council determines are, or are likely to become,
systemically important. Dodd-Frank Act sections 115, 120, 804, 12
U.S.C. 5325, 5330, 5463.
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a. Step One of the Activities-Based Approach: Identifying and
Assessing Potential Risks to U.S. Financial Stability
Identifying Potential Risks to U.S. Financial Stability
One of the Council's statutory purposes is to identify risks to
U.S. financial stability that could arise from within or outside the
financial services marketplace.\5\ In the first step of the
activities-based approach, to enable the Council to identify
potential risks to U.S. financial stability, the Council, in
consultation with relevant financial regulatory agencies, intends to
monitor diverse financial markets and market developments on a
system-wide basis to identify products, activities, or practices
that could pose risks to U.S. financial stability.\6\ When
monitoring potential risks to U.S. financial stability, the Council
intends to consider the linkages across products, activities,
regulations, and practices, their interconnectedness across firms
and markets, and their impact on economic growth. The Council's
analysis will be consistent with the analytic methodologies
described in Section II above.
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\5\ Dodd-Frank Act section 112(a)(1)(A), 12 U.S.C.
5322(a)(1)(A).
\6\ See Dodd-Frank Act section 2(12), 12 U.S.C. 5301(12). In
fulfilling the Council's duties to identify, assess, and respond to
potential risks to U.S. financial stability, the Council generally
intends to consult with, solicit information from, or coordinate
with relevant state or federal financial regulatory agencies.
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Assessing Potential Risks to U.S. Financial Stability
If the Council's monitoring of markets and market developments
identifies a potential risk to U.S. financial stability, the Council
will assess the potential risk to determine whether it merits
further action. The Council's work in this step may include efforts
such as sharing data, research, and analysis among Council members
and member agencies and their staffs; consultations with regulators
and other experts regarding the scope of potential risks and factors
that may mitigate those risks; and the collaborative development of
analyses for consideration by the Council. As part of this work, the
Council may also engage with industry participants and other members
of the public as it assesses potential risks to U.S. financial
stability.
Although the contours of the Council's initial assessment of any
potential risk to U.S. financial stability will depend on the type
and scope of analysis relevant to the particular risk, the Council's
analyses will generally focus on four framing questions:
1. What shocks or other developments could trigger the potential
risk to U.S. financial stability, and what vulnerabilities could be
implicated? For example, could the potential risk be triggered by
sharp reductions in the valuations of particular classes of
financial assets? This analysis will be consistent with the analysis
of vulnerabilities as described in Section II above.
2. How could the adverse effects of the potential risk to U.S.
financial stability be transmitted to financial markets or market
[[Page 15562]]
participants? For example, what are the direct or indirect exposures
in financial markets to the potential risk? This analysis will be
consistent with the analysis of transmission channels as described
in Section II above.
3. What impact could the potential risk to U.S. financial
stability have on the U.S. financial system? For example, what could
be the scale of its adverse effects on other companies and markets,
and would its effects be concentrated or distributed broadly among
market participants? This analysis should take into account factors
such as existing regulatory requirements or market practices that
mitigate potential risks.
4. Could the adverse effects of the potential risk to U.S.
financial stability impair financial intermediation or financial
market functioning to a degree that would be sufficient to inflict
significant damage on the broader U.S. economy?
b. Step Two of the Activities-Based Approach: Working With
Regulators To Respond to Potential Risks to U.S. Financial
Stability
If the Council's analysis under Section III.a of this appendix
identifies a potential risk to U.S. financial stability that merits
action, the Council generally will work with the relevant financial
regulatory agencies at the federal and state levels to respond to
the potential risk. The goal of this step would be for existing
regulators to take appropriate action, such as modifying their
regulation or supervision of companies or markets under their
jurisdiction in order to mitigate potential risks to U.S. financial
stability identified by the Council.\7\ If such a potential risk
identified by the Council relates to a product, activity, or
practice arising at a limited number of individual financial
companies, the Council may nonetheless prioritize a remedy that
addresses the underlying risk at other companies that engage in the
relevant activity, as appropriate, taking into account each
company's size, complexity, and business profile. The Council's
actions will be guided in part by its statutory purposes of
promoting market discipline and responding to emerging threats to
U.S. financial stability.
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\7\ The Dodd-Frank Act provides that the Council's duties
include recommending to the member agencies general supervisory
priorities and principles reflecting the outcome of discussions
among the member agencies and to make recommendations to primary
financial regulatory agencies to apply new or heightened standards
and safeguards for financial activities or practices that could
create or increase risks of significant liquidity, credit, or other
problems spreading among bank holding companies, nonbank financial
companies, and United States financial markets. Dodd-Frank Act
sections 112(a)(2)(F), (K), 12 U.S.C. 5322(a)(2)(F), (K).
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In cases where the Council has identified a potential risk to
U.S. financial stability that merits action, if existing regulators
have adequate authority, the regulators could take actions such as
modifying their regulation or supervision of companies or markets
under their jurisdiction to mitigate the identified risks. If
existing regulators can address a potential risk to U.S. financial
stability in a sufficient and timely way, the Council generally will
encourage those regulators to do so.
This process may result in recommendations to a financial
regulatory agency in the Council's annual report, which is required
by the Dodd-Frank Act to include recommendations (1) to enhance the
integrity, efficiency, competitiveness, and stability of U.S.
financial markets; (2) to promote market discipline; and (3) to
maintain investor confidence.\8\ After the Council makes
recommendations in an annual report, it will work with Council
member agencies, as appropriate, regarding steps taken to address
the potential risk to U.S. financial stability.
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\8\ Dodd-Frank Act section 112(a)(2)(N), 12 U.S.C.
5322(a)(2)(N).
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Alternatively, in certain cases, the Council may commence a
process for Council member agencies to act to address a potential
risk to U.S. financial stability. In these cases, the Council will
notify an existing financial regulatory agency in writing of the
potential risk to U.S. financial stability. The Council will request
a written response from the agency within a specified period
regarding the actions the agency proposes to take to address the
potential risk. The agency will be expected to provide detailed
information to the Council regarding its proposed actions, their
anticipated effects, and the expected timeline for implementation.
If, after engaging with relevant financial regulatory agencies,
the Council believes those regulators' actions are inadequate to
address the potential risk to U.S. financial stability, the Council
has authority to make formal public recommendations to primary
financial regulatory agencies under section 120 of the Dodd-Frank
Act. Under section 120, the Council may provide for more stringent
regulation of a financial activity by issuing nonbinding
recommendations, following consultation with the primary financial
regulatory agency and public notice inviting comments on proposed
recommendations, to the primary financial regulatory agency to apply
new or heightened standards or safeguards for a financial activity
or practice conducted by bank holding companies or nonbank financial
companies under their jurisdiction. In addition, in any case in
which no primary financial regulatory agency exists for the markets
or companies conducting financial activities or practices identified
by the Council as posing risks, the Council can consider reporting
to Congress on recommendations for legislation that would prevent
such activities or practices from threatening U.S. financial
stability. The Council intends to make recommendations to an agency
under section 120 only to the extent that its recommendations are
consistent with the statutory mandate of the primary financial
regulatory agency to which the Council is making the recommendation.
The authority to issue recommendations to primary financial
regulatory agencies under section 120 is one of the Council's formal
tools for responding to potential risks to U.S. financial stability.
The Council will make these recommendations only if it determines
that the conduct, scope, nature, size, scale, concentration, or
interconnectedness of the activity or practice could create or
increase the risk of significant liquidity, credit, or other
problems spreading among bank holding companies and nonbank
financial companies or U.S. financial markets.
In its recommendations under section 120, the Council may
suggest broad approaches to address the risks it has identified, or,
when appropriate, the Council may make a more specific
recommendation. To promote analytical rigor and avoid duplication,
before making any recommendation under section 120, the Council will
ascertain whether the relevant primary financial regulatory agency
would be expected to perform a cost-benefit analysis of the actions
it would take in response to the Council's contemplated
recommendation. In cases where the primary financial regulatory
agency would not be expected to conduct such an analysis, the
Council itself will conduct an analysis prior to making a final
recommendation, using empirical data, to the extent available, of
the benefits and costs of the actions that the primary financial
regulatory agency would be expected to take in response to the
contemplated recommendation. Where the Council conducts its own such
analysis, the specificity of its assessment of benefits and costs
would be commensurate with the specificity of the contemplated
recommendation. Furthermore, where the Council conducts its own
analysis, the Council will make a recommendation under section 120
only if it believes that the results of its assessment of benefits
and costs support the recommendation. In every case, prior to
issuing a recommendation under section 120, the Council will consult
with the relevant primary financial regulatory agency and provide
notice to the public and opportunity for comment as required by
section 120.
Nonbank Financial Company Determinations
As described in Section III above, the Council will prioritize
an activities-based approach for identifying, assessing, and
responding to potential risks to U.S. financial stability. If the
Council's collaboration and engagement with the relevant financial
regulatory agencies during the activities-based approach does not
adequately address a potential threat identified by the Council, and
if the potential threat identified by the Council is one that could
be effectively addressed by a Council determination regarding one or
more nonbank financial companies, the Council may evaluate one or
more nonbank financial companies for an entity-specific
determination under section 113 of the Dodd-Frank Act. This section
describes the analysis the Council will conduct in general regarding
individual nonbank financial companies that are considered for a
potential determination, and the Council's process for those
reviews.
Under section 113 of the Dodd-Frank Act, the Council may
determine, by a vote of not fewer than two-thirds of the voting
members of the Council then serving, including an affirmative vote
by the Chairperson of the
[[Page 15563]]
Council, that a nonbank financial company \9\ will be supervised by
the Federal Reserve and be subject to prudential standards if the
Council determines that (1) material financial distress at the
nonbank financial company could pose a threat to the financial
stability of the United States (``First Determination Standard'') or
(2) the nature, scope, size, scale, concentration,
interconnectedness, or mix of the activities of the nonbank
financial company could pose a threat to the financial stability of
the United States (``Second Determination Standard''). The Council
has issued a procedural rule regarding its process for considering a
nonbank financial company for potential designation under section
113.\10\ The Dodd-Frank Act requires the Council to consider 10
specific considerations, including the company's leverage,
relationships with other significant financial companies, and
existing regulation by primary financial regulatory agencies, when
determining whether a nonbank financial company satisfies either of
the determination standards.\11\ Due to the unique threat that each
nonbank financial company could pose to U.S. financial stability and
the nature of the inquiry required by the statutory considerations
set forth in section 113, the Council expects that its evaluations
of nonbank financial companies under section 113 will be firm-
specific; however, the analytic methodologies described in Section
III above would apply in the context of an analysis under section
113.
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\9\ In this context, the Council intends to interpret the term
``company'' to include any corporation, limited liability company,
partnership, business trust, association, or similar organization,
and ``nonbank financial company supervised by the Board of
Governors'' as including any nonbank financial company that
acquires, directly or indirectly, a majority of the assets or
liabilities of a company that is subject to a Final Determination of
the Council. See 12 U.S.C. 5311(a)(4) and 12 CFR 1310.2 for the
definition of ``nonbank financial company.''
\10\ See 12 CFR part 1310.
\11\ Dodd-Frank Act sections 113(a)(2) and (b)(2), 12 U.S.C.
5323(a)(2) and (b)(2).
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For purposes of section 113 of the Dodd-Frank Act, the Council
considers a ``threat to the financial stability of the United
States'' to mean the threat of an impairment of financial
intermediation or of financial market functioning to a degree that
would be sufficient to inflict severe damage on the broader U.S.
economy.\12\ When evaluating a nonbank financial company, the
Council may consider the company and its subsidiaries separately or
together, to enable the Council to consider potential risks arising
across the entire organization, while retaining the ability to make
a determination regarding either the parent or any individual
nonbank financial company subsidiary (or neither), depending on
which entity the Council determines could pose a threat to financial
stability.
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\12\ This interpretation of a ``threat'' to U.S. financial
stability refers to ``severe damage'' to the broader economy, while
the definition in section II above of a ``risk'' to U.S. financial
stability refers to ``significant damage'' to the broader economy.
This approach reflects that these distinct statutory terms, found in
sections 112 and 113 of the Dodd-Frank Act, should be given distinct
meanings.
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Assessments of Benefits and Costs
In addition to the Council's analytic methodologies described
above in Section II, in the context of potential determinations
regarding nonbank financial companies under section 113 of the Dodd-
Frank Act, the Council will assess whether the expected benefits of
a potential Council determination justify the expected costs.
Financial stability benefits may be difficult to quantify, and some
of the costs may be difficult to forecast with precision. When
possible, the Council will quantify reasonably estimable benefits
and costs, using ranges, as appropriate, and based on empirical data
when available. If such benefits or costs cannot be quantified in
this manner, the Council will explain why such benefits or costs
could not be quantified. The Council also expects to consider
benefits and costs qualitatively. To the extent feasible, the
Council will attempt to assess the relative importance of any such
qualitative elements. The Council will make a determination under
section 113 only if the expected benefits to financial stability
from Federal Reserve supervision and prudential standards justify
the expected costs that the determination would impose. As part of
this analysis, the Council will assess the likelihood of a firm's
material financial distress, as described below, in order to assess
the extent to which a determination may promote U.S. financial
stability, along with the extent to which material financial
distress at the nonbank financial company could pose a threat to the
financial stability of the United States.
The Council will conduct this analysis in cases where the
Council is concluding that the company meets one of the standards
for a determination by the Council under section 113 of the Dodd-
Frank Act.
Benefits. With respect to the benefits of a Council
determination, the Council will consider the benefits of the
determination itself, both to (1) the U.S. financial system, long-
term economic growth, and economic security and (2) the nonbank
financial company due to additional regulatory requirements
resulting from the determination, particularly the prudential
standards adopted by the Federal Reserve under section 165 of the
Dodd-Frank Act.
One of the Council's statutory purposes is to respond to
emerging threats to the stability of the U.S. financial system.\13\
The primary intended benefit of a determination under section 113 of
the Dodd-Frank Act is a reduction in the likelihood or severity of a
financial crisis. Therefore, the Council will consider potential
benefits to the U.S. financial system and the U.S. economy arising
from a Council determination. To the extent that a Council
determination reduces the likelihood or severity of a potential
financial crisis, the determination could enhance financial
stability and mitigate the severity of economic downturns. The
Council may use various measures of systemic risk to assess any
improvement in financial stability. Such measures include SRISK
(which attempts to quantify the amount of capital a financial firm
would need to raise in order to function normally in the event of a
severe financial crisis), conditional value at risk, and estimates
of fire sale risk, among others. To assess the benefit to the U.S.
financial system and the U.S. economy from a determination, the
Council may also consider historical analogues to the nonbank
financial company under review. In addition, where appropriate, the
Council may compare the risks to financial stability posed by a
particular nonbank financial company to the risks posed by large
bank holding companies, in order to produce an assessment of the
relative risks the company may pose. Further, the loss of any
implicit ``too big to fail'' subsidy would be considered a benefit
to the economy.
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\13\ Dodd-Frank Act section 112(a)(1)(C), 12 U.S.C.
5322(a)(1)(C).
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Analysis of the benefits of a determination for the relevant
nonbank financial company may include those arising directly from
the Council's determination as well as any benefits arising from
anticipated new or increased requirements resulting from the
determination, such as additional supervision and enhanced capital,
liquidity, or risk-management requirements. For example, a nonbank
financial company subject to a Council determination may benefit
from a lower cost of capital or higher credit ratings upon meeting
its post-determination regulatory requirements.
Costs. With respect to the costs of a Council determination, the
Council will consider the costs of the determination itself, both to
(1) the nonbank financial company due to additional regulatory
requirements resulting from the determination, including the costs
of the prudential standards adopted by the Federal Reserve under
section 165 of the Dodd-Frank Act; and (2) the U.S. economy,
including potential impacts on economic growth and economic
security.
The Council will consider costs to the company arising from
anticipated new or increased regulatory requirements resulting from
the determination related to:
<bullet> Risk-management requirements, such as the costs of
capital planning and stress testing.
<bullet> Supervision and examination, such as compliance costs
to the firm of additional examination and supervision.
<bullet> Increased capital requirements, after accounting for
offsetting benefits to taxpayers and to the holders of the firm's
other liabilities.
<bullet> Liquidity requirements, such as the opportunity cost
from any requirement to hold additional high-quality liquid assets,
relative to the company's current investment portfolio.
Because the Federal Reserve is required to tailor prudential
standards to a nonbank financial company subject to a Council
determination after the Council has made a determination regarding
the company, the new regulatory requirements that result from the
Council's determination will not be known to the Council during its
analysis of the company. In cases where the nonbank financial
company under review primarily engages in bank-like activities, the
Council may consider, as a proxy, the costs that
[[Page 15564]]
would be imposed on the nonbank if the Federal Reserve imposed
prudential standards similar to those imposed on bank holding
companies with at least $250 billion in total consolidated assets
under section 165 of the Dodd-Frank Act.\14\
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\14\ Dodd-Frank Act section 165, 12 U.S.C. 5365.
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The Council also will consider the cost of a determination under
section 113 of the Dodd-Frank Act to the U.S. economy by assessing
the impact of the determination on the availability and cost of
credit or financial products in relevant U.S. markets. To the extent
that the markets in which the relevant nonbank participates have low
concentration, the impact that the determination regarding one firm
would have on credit conditions would generally be immaterial.
However, if the relevant markets are concentrated, a Council
determination regarding a significant market participant could have
a material impact on credit conditions in that market. As part of
this analysis, the Council may also consider the extent to which any
reduction in financial services provided by the nonbank financial
company under review would be offset by other market participants.
Likelihood of Material Financial Distress. As part of the
assessment of the impact of a Council determination for any company
under review under the First Determination Standard, the Council
will assess the likelihood of the company's material financial
distress based on its vulnerability to a range of factors.\15\ For
example, these factors may include leverage (both on- and off-
balance sheet), potential risks associated with asset reevaluations
(whether such reevaluations arise from market disruptions or severe
macroeconomic conditions), reliance on short-term funding or other
fragile funding markets, maturity transformation, and risks from
exposures to counterparties or other market participants. This
assessment may rely upon historical examples regarding the
characteristics of financial companies that have experienced
financial distress, but may also consider other risks that do not
have historical precedent. The Council's analysis of the likelihood
of a nonbank financial company's material financial distress will be
conducted taking into account a period of overall stress in the
financial services industry and a weak macroeconomic environment.
The Council may also consider the results of any stress tests that
have previously been conducted by the company or by its primary
financial regulatory agency. In light of the unpredictability of the
failure of financial companies, the Council will not seek to
determine that a nonbank financial company's material financial
distress is reasonably likely, but instead will use this analysis to
evaluate the factors that could cause such distress as part of the
assessment of benefits of a designation as described above.
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\15\ The Council intends to interpret the term ``material
financial distress'' as a nonbank financial company being in
imminent danger of insolvency or defaulting on its financial
obligations.
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Administrative Process for Nonbank Financial Company Determinations
In the first stage of the process (``Stage 1''), nonbank
financial companies identified as potentially posing risks to U.S.
financial stability will be notified as described below and subject
to a preliminary analysis, based on quantitative and qualitative
information available to the Council primarily through public and
regulatory sources. During Stage 1, the Council will permit, but not
require, the company to submit relevant information. The Council
will also consult with the primary financial regulatory agency or
home country supervisor, as appropriate. This approach will enable
the Council to fulfill its statutory obligation to rely whenever
possible on information available through the Office of Financial
Research (the ``OFR''), Council member agencies, or the nonbank
financial company's primary financial regulatory agencies before
requiring the submission of reports from any nonbank financial
company.\16\
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\16\ See Dodd-Frank Act section 112(d)(3), 12 U.S.C. 5322(d)(3).
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Following Stage 1, nonbank financial companies that are selected
for additional review will receive notice that they are being
considered for a proposed determination that the company could pose
a threat to U.S. financial stability (a ``Proposed Determination'')
and will be subject to in-depth evaluation during the second stage
of review (``Stage 2''). Stage 2 will involve the evaluation of
additional information collected directly from the nonbank financial
company. At the end of Stage 2, the Council may consider whether to
make a Proposed Determination with respect to the nonbank financial
company. If a Proposed Determination is made by the Council, the
nonbank financial company may request a hearing in accordance with
section 113(e) of the Dodd-Frank Act and Sec. 1310.21(c) of the
Council's rule.\17\ After making a Proposed Determination and
holding any written or oral hearing if requested, the Council may
vote to make a Final Determination.
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\17\ See 12 CFR 1310.21(c).
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a. Stage 1: Preliminary Evaluation of Nonbank Financial Companies
Engagement With Company and Regulators in Stage 1
The Council will provide a notice to any nonbank financial
company under review in Stage 1 no later than 60 days before the
Council votes on whether to evaluate the company in Stage 2. In
Stage 1, the Council will consider available public and regulatory
information. In order to reduce the burdens of review on the
company, the Council will not require the company to submit
information during Stage 1; however, a company under review in Stage
1 may submit to the Council any information relevant to the
Council's evaluation and may, upon request, meet with staff of
Council members and member agencies who are leading the Council's
analysis. The Council may request a page-limited summary of the
company's submissions. In addition, staff representing the Council
will, upon request, provide the company with a list of the primary
public sources of information being considered during the Stage 1
analysis, so that the company has an opportunity to understand the
information the Council may rely upon during Stage 1. In addition,
during discussions in Stage 1 with the company, the Council intends
for representatives of the Council to indicate to the company
potential risks to U.S. financial stability that have been
identified in the analysis. However, any potential risks identified
at this stage are preliminary and may continue to develop until the
Council makes a Final Determination. Through this engagement, the
Council seeks to provide the company under review an opportunity to
understand the focus of the Council's analysis, which may enable the
company to act to mitigate any risks to U.S. financial stability and
thereby potentially avoid becoming subject to a Council
determination.
The Council will also consider in Stage 1 information available
from relevant existing regulators of the company. Under the Dodd-
Frank Act, the Council is required to consult with the primary
financial regulatory agency, if any, for each nonbank financial
company or subsidiary of a nonbank financial company that is being
considered for a determination before the Council makes any Final
Determination with respect to such company.\18\ For any company
under review in Stage 1 that is regulated by a primary financial
regulatory agency or home country supervisor, the Council will
notify the regulator or supervisor that the company is under review
no later than the time the company is notified. The Council will
also consult with the primary financial regulatory agency, if any,
of each significant subsidiary of the nonbank financial company, to
the extent the Council deems appropriate in Stage 1. The Council
will actively solicit the regulator's views regarding risks at the
company and potential mitigants or aggravating factors. In order to
enable the regulator to provide relevant information, the Council
will share its preliminary views regarding potential risks at the
company, if any and to the extent practicable, and request that the
regulator provide information regarding those specific risks,
including the extent to which the risks are adequately mitigated by
factors such as existing regulation or the company's business
practices. During the determination process, the Council will
encourage the regulator to address any risks to U.S. financial
stability using the regulator's existing authorities; if the Council
believes regulators' or the company's actions have adequately
addressed the potential risks to U.S. financial stability the
Council has identified, the Council may discontinue its
consideration of the company for a potential determination under
section 113 of the Dodd-Frank Act.
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\18\ Dodd-Frank Act section 113(g), 12 U.S.C. 5323(g).
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Based on the preliminary evaluation in Stage 1, the Council
intends to identify steps a nonbank financial company or financial
regulatory agencies could take to address a potential threat to U.S.
financial stability. Subject to any necessary administrative
procedures required to remediate the risk, the
[[Page 15565]]
Council generally expects material risks to U.S. financial stability
to be addressed within 180 days.
At the end of Stage 1, the Council may, on a nondelegable basis,
vote to commence a more detailed analysis of the company by
advancing the company to Stage 2, or it may decide not to evaluate
the company further. If the Council votes not to advance a company
that has been reviewed in Stage 1 to Stage 2, the Council will
notify the company in writing of the Council's decision. The notice
will clarify that a decision not to advance the company from Stage 1
to Stage 2 at that time does not preclude the Council from
reinitiating review of the company in Stage 1.
In light of the preliminary nature of a review in Stage 1, the
Council expects that not all companies reviewed in Stage 1 will
proceed to Stage 2 or a Final Determination.
b. Stage 2: In-Depth Evaluation
Stage 2 involves an in-depth evaluation of a nonbank financial
company that the Council has determined merits additional review.
In Stage 2, the Council will review a nonbank financial company
using information collected directly from the company, through the
OFR, as well as public and regulatory information. The review will
focus on whether material financial distress at the nonbank
financial company, or the nature, scope, size, scale, concentration,
interconnectedness, or mix of the activities of the company, could
pose a threat to U.S. financial stability.
Engagement With Company and Regulators in Stage 2
A nonbank financial company to be evaluated in Stage 2 will
receive a notice (a ``Notice of Consideration'') that the company is
under consideration for a Proposed Determination. The Council also
will submit to the company a request that the company provide
information that the Council deems relevant to the Council's
evaluation, and the nonbank financial company will be provided an
opportunity to submit written materials to the Council.\19\ This
information will generally be collected by the OFR.\20\ Before
requiring the submission of reports from any nonbank financial
company that is regulated by a Council member agency or a primary
financial regulatory agency, the Council, acting through the OFR,
will coordinate with such agencies and will, whenever possible, rely
on information available from the OFR or such agencies. Council
members and their agencies and staffs will maintain the
confidentiality of such information in accordance with applicable
law. During Stage 2, the company may also submit any other
information that it deems relevant to the Council's evaluation.
Information that may be considered by the Council includes details
regarding the company's financial activities, legal structure,
liabilities, counterparty exposures, resolvability, and existing
regulatory oversight. Information requests likely will involve both
qualitative and quantitative information. Information relevant to
the Council's analysis may include confidential business information
such as detailed information regarding financial assets, terms of
funding arrangements, counterparty exposure or position data,
strategic plans, and interaffiliate transactions.
---------------------------------------------------------------------------
\19\ See 12 CFR 1310.21(a).
\20\ See Dodd-Frank Act section 112(d), 12 U.S.C. 5322(d).
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The Council will make staff representing Council members
available to meet with the representatives of any company that
enters Stage 2, to explain the evaluation process and the framework
for the Council's analysis. In addition, the Council expects that
its Deputies Committee will grant a request to meet with a company
in Stage 2 to allow the company to present any information or
arguments it deems relevant to the Council's evaluation. If the
analysis in Stage 1 has identified specific aspects of the company's
operations or activities as the primary focus for the evaluation,
staff will notify the company of those specific aspects, although
the areas of analytic focus may change based on the ongoing
analysis.
During Stage 2, the Council will also seek to continue its
consultation with the company's primary financial regulatory agency
or home country supervisor in a timely manner before the Council
makes a Proposed or Final Determination with respect to the company.
The Council will continue to encourage the regulator during the
determination process to address any risks to U.S. financial
stability using the regulator's existing authorities; as noted
above, if the Council believes regulators' or the company's actions
adequately address the potential risks to U.S. financial stability
the Council has identified, the Council would expect to discontinue
its consideration of the company for a potential determination under
section 113 of the Dodd-Frank Act.
Before making a Proposed Determination regarding a nonbank
financial company, the Council will notify the company when the
Council believes that the evidentiary record regarding the company
is complete.\21\ The Council will notify any nonbank financial
company in Stage 2 if the company ceases to be considered for a
determination. Any nonbank financial company that ceases to be
considered at any time in the Council's determination process may be
considered for a potential determination in the future at the
Council's discretion, consistent with the processes described above.
---------------------------------------------------------------------------
\21\ See 12 CFR 1310.21(a)(3).
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c. Proposed and Final Determination
Proposed Determination
Based on the analysis performed in Stage 2, a nonbank financial
company may be considered for a Proposed Determination. A Proposed
Determination requires a vote, on a nondelegable basis, of two-
thirds of the voting members of the Council then serving, including
an affirmative vote by the Chairperson of the Council.\22\ Following
a Proposed Determination, the Council will issue a written notice of
the Proposed Determination to the nonbank financial company, which
will include an explanation of the basis of the Proposed
Determination.\23\ Promptly after the Council votes to make a
Proposed Determination regarding a company, the Council will provide
the company's primary financial regulatory agency or home country
supervisor with the nonpublic written explanation of the basis of
the Council's Proposed Determination (subject to appropriate
protections for confidential information).
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\22\ 12 CFR 1310.10(b).
\23\ See Dodd-Frank Act section 113(e)(1), 12 U.S.C. 5323(e)(1).
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Hearing
A nonbank financial company that is subject to a Proposed
Determination may request a nonpublic hearing to contest the
Proposed Determination in accordance with section 113(e) of the
Dodd-Frank Act and Sec. 1310.21(c) of the Council's rule regarding
nonbank financial company determinations.\24\ If the nonbank
financial company requests a hearing in accordance with the
procedures set forth in Sec. 1310.21(c), the Council will set a
time and place for such hearing. The Council has published hearing
procedures on its website.\25\ In light of the statutory timeframe
for conducting a hearing, and the fact that the purpose of the
hearing is to benefit the company, if a company requests that the
Council waive the statutory deadline for conducting the hearing, the
Council may do so in appropriate circumstances.
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\24\ See 12 CFR 1310.21(c).
\25\ Financial Stability Oversight Council Hearing Procedures
for Proceedings Under Title I or Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, available at <a href="https://fsoc.gov">https://fsoc.gov</a>.
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Final Determination
After making a Proposed Determination and holding any requested
written or oral hearing, the Council, on a nondelegable basis, may,
by a vote of not fewer than two-thirds of the voting members of the
Council then serving (including an affirmative vote by the
Chairperson of the Council), make a Final Determination that the
company will be subject to supervision by the Federal Reserve and
prudential standards. If the Council makes a Final Determination, it
will provide the company with a written notice of the Council's
Final Determination, including an explanation of the basis for the
Council's decision.\26\ The Council will also provide the company's
primary financial regulatory agency or home country supervisor with
the nonpublic written explanation of the basis of the Council's
Final Determination (subject to appropriate protections for
confidential information). The Council expects that its explanation
of the basis for any Final Determination will highlight the key
risks that led to the determination and include guidance regarding
the factors that were important in the Council's determination. When
practicable and consistent with the purposes of the determination
process, the Council will provide a nonbank financial company with
notice of a Final Determination at least one business day before
publicly announcing the
[[Page 15566]]
determination pursuant to Sec. 1310.21(d)(3), Sec. 1310.21(e)(3),
or Sec. 1310.22(d)(3) of the Council's rule.\27\ In accordance with
the Dodd-Frank Act, a nonbank financial company that is subject to a
Final Determination may bring an action in U.S. district court for
an order requiring that the determination be rescinded.\28\
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\26\ Dodd-Frank Act section 113(e)(3), 12 U.S.C. 5323(e)(3); see
also 12 CFR 1310.21(d)(2) and (e)(2).
\27\ See 12 CFR 1310.21(d)(3) and (e)(3) and 1310.22(d)(3).
\28\ See Dodd-Frank Act section 113(h), 12 U.S.C. 5323(h).
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The Council does not intend to publicly announce the name of any
nonbank financial company that is under evaluation prior to a Final
Determination with respect to such company. However, if a company
that is under review in Stage 1 or Stage 2 publicly announces the
status of its review by the Council, the Council intends, upon the
request of a third party, to confirm the status of the company's
review. In addition, the Council will publicly release the
explanation of the Council's basis for any Final Determination or
rescission of a determination, following such an action by the
Council. The Council is subject to statutory and regulatory
requirements to maintain the confidentiality of certain information
submitted to it by a nonbank financial company or its
regulators.\29\ In light of these confidentiality obligations, such
confidential information will be redacted from the materials that
the Council makes publicly available, although the Council does not
expect to restrict a company's ability to disclose such information.
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\29\ See Dodd-Frank Act section 112(d)(5), 12 U.S.C. 5322(d)(5);
see also 12 CFR 1310.20(e).
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d. Annual Reevaluations
After the Council makes a Final Determination regarding a
nonbank financial company, the Council intends to encourage the
company or its regulators to take steps to mitigate the potential
risks identified in the Council's written explanation of the basis
for its Final Determination. Except in cases where new material
risks arise over time, if the potential risks identified in writing
by the Council at the time of the Final Determination and in
subsequent reevaluations have been adequately addressed, generally
the Council would expect to rescind its determination regarding the
company.
For any nonbank financial company that is subject to a Final
Determination, the Council is required to reevaluate the
determination at least annually, and to rescind the determination if
the Council determines that the company no longer meets the
statutory standards for a determination.\30\ The Council may also
consider a request from a company for a reevaluation before the next
required annual reevaluation, in the case of an extraordinary change
that materially affects the Council's analysis.
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\30\ Dodd-Frank Act section 113(d), 12 U.S.C. 5323(d).
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The Council will apply the same standards of review in its
annual reevaluations as the standards for an initial determination
regarding a nonbank financial company: either material financial
distress at the company, or the nature, scope, size, scale,
concentration, interconnectedness, or the mix of the company's
activities, could pose a threat to U.S. financial stability. If the
Council determines that the company does not meet either of those
standards, the Council will rescind its determination.
The Council's annual reevaluations will generally assess whether
any material changes since the previous reevaluation and since the
Final Determination justify a rescission of the determination. The
Council expects that its reevaluation process will focus on whether
any material changes that have taken effect--including changes at
the company, changes in its markets or its regulation, changes in
the impact of relevant factors, or otherwise--result in the company
no longer meeting the standards for a determination. In light of the
frequent reevaluations, the Council's analyses will generally focus
on material changes since the Council's previous review, but the
ultimate question the Council will seek to assess is whether changes
in the aggregate since the Council's Final Determination regarding
the company have caused the company to cease meeting either of the
statutory standards for a determination.
During the Council's annual reevaluation of a determination
regarding a nonbank financial company, the Council will provide the
company with an opportunity to meet with representatives of the
Council to discuss the scope and process for the review and to
present information regarding any change that may be relevant to the
threat the company could pose to financial stability. In addition,
during an annual reevaluation, the company may submit any written
information to the Council the company deems relevant to the
Council's analysis. During annual reevaluations, a company is
encouraged to submit information regarding any changes related to
the company's risk profile that mitigate the potential risks
previously identified by the Council. Such changes could include
updates regarding company restructurings, regulatory developments,
market changes, or other factors. If the company or its regulators
have taken steps to address the potential risks previously
identified by the Council, the Council will assess whether the risks
have been adequately mitigated to merit a rescission of the
determination regarding the company. If the company explains in
detail and in a timely manner potential changes it could make to its
business to address the potential risks previously identified by the
Council, representatives of the Council will endeavor to provide
their feedback on the extent to which those changes may address the
potential risks.
If a company contests the Council's determination during the
Council's annual reevaluation, the Council will vote on whether to
rescind the determination and provide the company, its primary
financial regulatory agency or home country supervisor, and the
primary financial regulatory agency of its significant subsidiaries
with a notice explaining the primary basis for any decision not to
rescind the determination. If the Council does not rescind the
determination, the written notice provided to the company will
address the most material factors raised by the company in its
submissions to the Council contesting the determination during the
annual reevaluation. The written notice from the Council will also
explain why the Council did not find that the company no longer met
the standard for a determination under section 113 of the Dodd-Frank
Act. In general, due to the sensitive, company-specific nature of
its analyses in annual reevaluations, the Council generally would
not publicly release the written findings that it provides to the
company, although the Council does not expect to restrict a
company's ability to disclose such information.
Finally, the Council will provide each nonbank financial company
subject to a Council determination an opportunity for an oral
hearing before the Council once every five years at which the
company can contest the determination.
Christina Skinner,
Deputy Assistant Secretary for the Council.
[FR Doc. 2026-06114 Filed 3-27-26; 8:45 am]
BILLING CODE P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.