Treasury Issues Report Proposing Changes to FSOC Designation Process

By Gordon S. Woodward

On April 21, 2017, President Trump issued a Presidential Memorandum directing the U.S. Department of the Treasury to evaluate and make recommendations on the Financial Stability Oversight Council’s (FSOC) designation process.  The FSOC is a panel consisting of the heads of U.S. financial regulatory agencies, including the Treasury, the SEC and the CFPB, which was created by the Dodd-Frank-Act of 2010 to monitor the financial system. The panel may designate nonbank firms as “systemically important financial institutions” (SIFIs), which subjects them to enhanced supervision by the Federal Reserve. The intent was to identify and monitor firms, other than big banks, whose failure could imperil the economy (large banks such as JPMorgan Chase and Goldman Sachs were automatically designated as SIFIs under Dodd-Frank).

On November 17, 2017, the U.S. Department of the Treasury responded to the April 21st Presidential Memorandum with a report proposing changes to FSOC’s designation process. Proposed changes include enhancing communication between FSOC and the companies under review. In addition, FSOC should assess the likelihood of a firm’s financial distress and conduct a cost-benefit analysis, designating a firm only if the “expected benefits to financial stability outweigh the costs of designation.” The report also calls for an “off-ramp” that companies may follow to avoid the SIFI designation.

The Treasury proposal differs significantly from the approach proposed in the Financial CHOICE Act, which the U.S. House of Representatives passed in June. That act would strip the FSOC of most of its regulatory authority, including the ability to designate nonbank financial firms as SIFIs.

As a result, the administration has signaled a middle ground approach to SIFI regulation.  The FSOC will, for the time being, survive Congress’s deregulatory push but with limitations designed to address Wall Street’s most significant concerns.

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