FSOC authorizes raising nonbank systemic risk threshold

The Financial Stability Oversight Council voted to raise the standard for designating nonbank firms for increased prudential oversight by the Federal Reserve. .The March 25 vote changes the guidance from a specific numerical threshold set in 2023 by former President Joe Biden to a “very high” standard depending on whether regulators see a nonbank’s distress threatening financial stability. The standard is similar to the framework FSOC published during the first Trump administration in 2019. The vote followed supportive comments from Comptroller of the Currency Jonathan Gould. He said the “cost-benefit analysis also affords an opportunity to determine whether, among other things, subjecting the nonbank financial company to bank-like regulation would actually mitigate the identified risks to financial stability posed by the company.“Given the considerable cost and invasiveness of bank-like regulation, and the narrow purposes for which such regulation was designed, the nonbank designation process should be approached with caution and restraint,” he added. Gould connected the situation to his time as a lawyer helping insurance giant MetLife during FSOC’s attempt to subject the company to Federal Reserve supervision. “The government’s efforts back then were, and remain, among the most egregious abuses of government power I have seen in my 25-year career,” Gould said. No firms have been designated as a systemically important financial institution in more than a decade, with MetLife being the last in late 2014. MetLife sued FSOC over the designation, winning its case in court in 2016.The Independent Community Bankers of America supported the rules introduced in 2023. “Large nonbank financial institutions that pose outsized risks to the financial system similar to those posed by large banks should be required to meet similar capital and liquidity standards,” ICBA President and CEO Rebeca Romero Rainey said at the time.