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You’d be forgiven for missing it, but last week the US government quietly reversed one of the biggest deregulatory moves the Trump administration made for the finance industry.
The Financial Stability Oversight Council — an overarching body for US financial regulators overseen by the Treasury secretary — on Friday voted for a “new analytic framework for financial stability risks and updated guidance on the Council’s nonbank financial company determinations process”.
Here’s some more regulatory gobbledegook from the press release:
The Council’s new Analytic Framework for Financial Stability Risk Identification, Assessment, and Response (Analytic Framework) offers a detailed public explanation of how the Council monitors, assesses, and responds to potential risks to financial stability, whether they come from widely conducted activities or from individual firms. The Analytic Framework details the vulnerabilities and transmission channels that most commonly contribute to risks to financial stability, and it explains the range of authorities the Council may use to address any particular risk — including interagency coordination, recommendations to regulators, or the designation of certain entities.
The updated Guidance for Nonbank Financial Company Determinations (Nonbank Designations Guidance) sets forth the Council’s procedures for considering whether to designate a nonbank financial company for Federal Reserve supervision and prudential standards under section 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The Nonbank Designations Guidance provides a transparent process and significant opportunities for engagement with both a nonbank financial company under review and its existing regulators.
In plain(ish) English, FSOC is once again opening the door for designating non-banks — primarily giant insurance groups, asset managers, private capital firms and hedge funds — as “systemically important”, and therefore subject to more stringent inspection and regulation.
Here’s what Janet Yellen said:
“Financial stability is a public good, and we need a robust structure to monitor and address the build-up of risks that could threaten the financial system. Congress created FSOC after the global financial crisis to identify and respond to risks to financial stability, and our actions today go to the heart of fulfilling that critical mission. Establishing an analytic framework and a durable process for the Council’s use of its designation authority will strengthen our ability to mitigate the risks of financial crises that can devastate businesses and households.”
The Trump administration rolled back this post-financial crisis measure in 2019, which was widely seen as just another sign of a dangerous deregulatory agenda — and an attempt to juice the economy short-term at the cost of longer-term dangers.
That’s why Better Markets’ Dennis Kelleher was so chuffed at Friday’s news (which has been in the offing since at least April). Here’s what he said in an email:
JPMorgan Chase’s CEO Jamie Dimon is right: when systemically important banks are regulated, systemically important nonbanks are ‘dancing in the streets.’ That’s because the FSOC has been AWOL, resulting in an unlevel and unfair playing field because systemically important nonbanks have not been regulated like systemically important banks. However, the solution is not, as Jamie Dimon seems to suggest, that banks should be under-regulated; the solution is for nonbanks to be properly regulated, as I have said before along with the President of the American Bankers Association (ABA), and that is why the FSOC’s action today is so important.
We applaud today’s action by the FSOC to revitalize its designation authority for systemically important nonbanks and create a framework for nonbank risk evaluation. These actions restore the FSOC’s vitally important mission and mandate: stop the unseen and unregulated buildup of systemic threats from nonbanks and stop the regulatory arbitrage that results from risk migrating from the regulated banking system to the unregulated nonbanking system. In blatant violation of the letter and spirit of the law, the Trump administration had crippled the FSOC and dangerously deregulated systemically important nonbanks to the point where today there is not one single designated and properly regulated systemically important nonbank or activity in the United States.
However, it doesn’t seem quite so simple?
The reality is that when FSOC shifted to an “activities-based approach” (as opposed to a bank-style company-focused approach) there weren’t any non-banks left on its watchlist anyway. Most of all, copying and pasting the company-focused regulatory approach for banks to non-banks has always looked a bit weird.
If you squint hard they may all look the same, but there really are some pretty major differences that have huge implications for how you should regulate these entities.
For sure, the Trump FSOC’s move to an activities-based approach was probably an excuse to do nothing, but that doesn’t mean that it was wrong in theory. For non-banks it does make sense to focus more on the broader ecosystem, rather than individual companies.
So while it won’t hurt to shift the regulatory Eye of Sauron onto a few specific investors and investment groups, this hopefully won’t lead to them missing the wood for the trees.
But if you’re into these kinds of things, here is the full and updated “Interpretive Guidance Regarding Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies”. Enjoy!
