The Financial Stability Oversight Council (FSOC) formally adopted several new measures on Wednesday designed to strengthen both its process for evaluating and potentially designating financial institutions as systemically important (SIFIs) and improve its communication with firms under consideration for designation and the general public. This evening, FSOC issued a press release announcing those changes, including the full list of “supplemental procedures” for the designation process that it approved, and a frequently asked questions document on the designation process.
As we wrote last month, the proposed changes are significant improvements on the existing process, but probably will not address the concerns of FSOC’s most vociferous critics. Increased communication with companies under consideration for designation should lead to more informed decision-making, while enhanced public transparency will increase FSOC’s credibility and give market participants more information on which to make decisions.
The measures approved on Wednesday result from a months-long review process in which FSOC engaged internally and externally with various stakeholders, including the Bipartisan Policy Center (BPC). BPC applauds FSOC for responding to valid criticisms and adopting these much-needed reforms. Nonetheless, we believe that FSOC still has more work to do in order to better address its core missions of improving coordination among regulators and focusing on potential threats to financial stability.
Here are our quick takes on some of the key measures that the FSOC adopted:
1. Improving engagement with companies being considered for designation: FSOC will now notify companies when they reach “Stage 2″ of the evaluation process, provide a list of information being considered by the council and allow those companies to directly engage with FSOC staff and staff of FSOC member agencies. Enhanced engagement will continue into the final “Stage 3″ portion of the evaluation process and will involve increased engagement with a company’s current primary regulator. If a company is proposed for designation or designated, FSOC will grant any request for a hearing the company makes.
BPC Reaction: As BPC’s Systemic Risk Task Force found when making similar recommendations, “Better interaction between these entities [those under consideration for designation] and the Council ought to improve the process by which designation occurs, thereby increasing regulatory quality.”
2. Enhancing public transparency: FSOC will make public how it calculates thresholds for its initial “Stage 1″ evaluation. In addition, FSOC will publicly release greater detail on its reasoning for any future SIFI designations. This continues a trend in which FSOC has given a more expansive public accounting of its rationale for its successive designation of companies. If a company publicly states that it is being evaluated by FSOC for possible designation, the council will be able to confirm that. Previously, FSOC had refused to announce or confirm whether any company was at any stage until final designation had occurred.
BPC Reaction: Making public the “Stage 1” thresholds will allow the public to understand and identify firms that have met FSOC’s thresholds. Increased public accountability for the process for both financial firms and FSOC is a positive step forward. FSOC’s inability to confirm what companies were forced to disclose to the public increased confusion and reduced confidence in the council. Fixing this is low-hanging fruit that will reduce potential confusion.
3. Making the annual review process more meaningful: FSOC will improve its engagement with designated SIFIs during its annual review to assess whether a firm’s SIFI status should be rescinded or not. If a company unsuccessfully appeals a decision in an annual review, FSOC will provide a detailed explanation of why it was rejected.
BPC Reaction: The Dodd-Frank Act envisioned that SIFI designation would be a two-way street, not a “Hotel California” with no way out. A viable process for SIFI “de-designation” is necessary to fulfill Dodd-Frank’s vision.
Aaron Klein and Justin Schardin oversee the Financial Regulatory Reform Initiative, which provides regular commentary and analysis on the FSOC and other financial policy developments. Aaron can be reached at [email protected]; Justin can be reached at [email protected].