Financial Stability Oversight Council

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See also Council of Regulators, European Systemic Risk Board, systemic regulator and trading book risk. Image:FSOC banner.jpg

Contents

FSOC publishes operating policies

As established under the Dodd-Frank Act, the Financial Stability Oversight Council (FSOC) will provide, for the first time, comprehensive monitoring to ensure the stability of our nation's financial system. The Council is charged with identifying threats to the financial stability of the United States; promoting market discipline; and responding to emerging risks to the stability of the United States financial system.

The Council’s bylaws set forth the manner and procedures by which that body will be governed. They provide for a collaborative governance structure that promotes accountability for the work of the Council.

The member agencies of the Council share a collective desire to bring efficiency and transparency to the financial reform implementation process. The transparency policy approved today ensures that the Council will engage stakeholders in an open process based on consistent principles of transparency and accountability. The Council adopted a transparency policy that will include open meetings as appropriate, with provisions to close meetings in situations where the discussion includes market sensitive or confidential supervisory information.

ANPR Regarding Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies The Dodd-Frank Act gives the Council a mandate to designate systemically important nonbank financial firms for heightened supervision, in order to ensure that these institutions cannot escape tough oversight or threaten the stability of the broader financial sector. The ANPR is an initial step in the process by which the Council intends to develop a robust and disciplined framework for the designation of nonbank financial companies for heightened supervision. The ANPR consists of fifteen questions to solicit public comment regarding the implementation of these provisions and will have a 30-day public comment period. The ANPR will inform development of a specific regulatory proposal expected to be published for comment near year-end, with Final Council action on the designation criteria and process is expected by March 31, 2011. The final ANPR, as agreed to today, will be posted on the FSOC website upon publication by the Federal Register.

Notice and Request for Information Regarding the Council’s “Volcker Rule” Study and Recommendations The Dodd-Frank Act requires the Council to conduct a study and make recommendations by January 22, 2011, to inform coordinated agency rulemaking on the “Volcker Rule.” The Volcker Rule will help improve the safety of our nation’s banking system by prohibiting proprietary trading activities and certain private fund investments. The Notice and Request for Information (RFI) provides an effective mechanism for soliciting public and industry input during the development of the Council’s formal study and recommendations. The RFI will have a 30-day public comment period. The final Notice, as agreed to on October 1st, will be posted on the FSOC website upon publication by the Federal Register.

The “Integrated Implementation Roadmap” outlines a coordinated timeline of goals, both of the Council and its independent member agencies, to fully implement the Dodd-Frank Act. This roadmap is the product of a mutual effort to provide transparency as financial regulatory agencies move forward with financial reform. This roadmap includes statutory deadlines as well as non-statutory targets for agency work that may be updated over time. View below or download the pdf here.

FSOC in Dodd-Frank

Establishment and Structure of the Financial Stability Oversight Council

The council is established as of the effective date of the Dodd-Frank Act and will meet not less frequently than quarterly.

The secretary of the Treasury will serve as the chairperson of the council.

The council will consist of federal and state regulators and have a total of 10 voting members, including the secretary of the Treasury, and five nonvoting members.

Voting members of the council include the chairman of the Federal Reserve Board of Governors (the Fed), the Comptroller of the Currency, the director of the Bureau of Consumer Financial Protection established by the Act, the chairman of the SEC, the chairperson of the FDIC, the chairperson of the Commodity Futures Trading Commission, the director of the Federal Housing Finance Agency, the chairman of the National Credit Union Administration Board and an independent member with expertise in insurance to be appointed by the President with the advice and consent of the Senate.

In addition to the independent member, the President must appoint several other members of the council. The Dodd-Frank Act is silent as to whether the council can begin operations before the Senate confirms the Presidential appointees, but based on the statements of Secretary of the Treasury Timothy F. Geithner discussed below, it appears that the council will meet before all members are appointed.

The council will serve as the systemic risk regulator of the U.S. economy. The purposes of the council are 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 with more than $50 billion in assets or nonbank financial companies designated by the council for supervision under the Fed, or that could arise outside the financial services marketplace
  • promote market discipline by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the U.S. government will shield them from losses in the event of failure, and
  • respond to emerging threats to the stability of the U.S. financial system.

By a vote of at least two-thirds of the voting members, including an affirmative vote by the secretary of the Treasury, the council may designate a U.S. nonbank financial company or a foreign nonbank financial company as systemically important and subject to supervision and regulation by the Fed.

The Fed is required by the act to develop enhanced prudential standards for these systemically important companies, with respect to

  • risk-based capital,
  • leverage limits,
  • liquidity requirements,
  • overall risk management requirements,
  • resolution plans,
  • credit exposure report requirements and
  • concentration limits,

that are more stringent than the standards applicable to nonbank financial companies and bank holding companies not deemed to pose the same risk.

The council will make this designation if financial distress at the company, or the nature, scope, size, scale, concentration, interconnectedness, or mix of activities of the company, could pose a threat to the financial stability of the United States. In making this designation, the act states that “the council shall consider:

  • the extent of the company’s leverage;
  • the extent and nature of the organization’s off-balance sheet exposures;
  • the extent and nature of the company’s transactions and relationships with other significant nonbank financial companies and significant bank holding companies;
  • the importance of the company as a source of credit for households, businesses, and State and local governments and as a source of liquidity for the U.S. financial system;
  • the importance of the company as a source of credit for low-income, minority, or underserved communities and the impact the failure of such company would have on the availability of credit in such communities;
  • the extent to which the company’s assets are managed rather than owned by the company and the extent to which ownership of assets under management is diffuse;
  • the nature, scope, size, scale, concentration, interconnectedness, and mix of the activities of the company;
  • the degree to which the company is already regulated by one or more primary financial regulatory agencies (the primary supervisory authority of a foreign company must be comparable to a U.S. supervisory authority);
  • the amount and nature of the financial assets of the company;
  • the amount and types of the liabilities of the company, including the degree of reliance on short-term funding; and
  • any other risk-related factors that the council deems appropriate.”

Pepper Points: The act grants the council broad investigative powers to determine whether a nonbank financial company poses a threat to the stability of the U.S. financial system and should therefore be subject to supervision by the Fed. Acting through the Office of Financial Research, the council can collect reports from nonbank financial companies and, if necessary, request that the Fed conduct an examination of a company to determine if it is systemically important.

Nonbank financial companies that feel they may be considered systemically important should prepare themselves for possible requests from the council or even examinations by the Fed. These companies should closely monitor statements that come from the council to determine how often and to what degree these request tools will be used by the council.

Initial Meeting of the Council

On August 2, 2010, in a speech at New York University’s Stern School of Business, Geithner stated that the first meeting of the council would take place in September.

The Financial Stability Oversight Board’s Web site indicates that the council’s first meeting will take place in October. The Financial Stability Oversight Board is a government organization established to oversee the Troubled Assets Relief Program (TARP). Although the act does not mandate that the first meeting of the council take place by a certain date, an interpretation of the requirement that the council meet not less frequently than quarterly suggests that the council must meet within one quarter, or 90 days, of the establishment date of the council. This would suggest that the council must meet within 90 days of July 21, 2010, or, by October 21, 2010. As of the date of this Alert, however, the council has not scheduled its initial meeting.

The council will have much to discuss at its first meeting. In his speech at Stern, Geithner stated that the council would “establish an integrated road map for the first stages of reform and put that in the public domain” at its first meeting. At the very least we can expect the council to develop an initial plan as to how the various entities charged with implementing the Dodd-Frank Act, namely the Fed, the SEC, the FDIC and other agencies, intend to work collaboratively on the writing of regulations pertaining to systemic risk.

The council will also likely discuss processes for determining how U.S. and foreign nonbank financial companies will be designated as systemically important and subject to supervision by the Fed. In his recent remarks at the New England Council, Treasury Deputy Secretary Neal S. Wolin has stated that one of the most important aspects of the Dodd-Frank Act is the ability of regulators to subject the most complex financial institutions to consolidated supervision regardless of the corporate form.

The council’s mandate is to monitor risk to the entire U.S. financial system, so it will look to bring any company that could potentially pose a threat to the system under the supervision of the Fed. The council will look to supervise large, interconnected financial companies so that it can identify systemic risk to the financial system should one of these companies experience significant distress or fail.

Pepper Points: If it appears, based on the act and any disclosures from the council’s first meeting, that the council could designate a company as systemically important, the company should prepare to oppose the designation if it is so inclined. The act provides a company designated as systemically important the opportunity to request a hearing to contest the determination. Once the council designates a company as significantly important it must inform the company in writing within 30 days of the designation. The company then may request a written or oral hearing to contest the council’s determination within 30 days of receipt of the written notice. If a hearing is requested, the council must conduct one within 30 days of the request. The council must make a final determination within 60 days of the hearing. If unsuccessful at the hearing, not later than 30 days after the date of receipt of the notice of final determination, the company may bring an action in U.S. district court for an order requiring that the final determination be rescinded on the grounds that the determination is arbitrary and capricious. If a company feels that it may be designated as systemically important it may wish to begin determining whether it would contest such a determination and begin to prepare arguments, especially since it is entirely possible that the Department of the Treasury has already begun to prepare a preliminary list of nonbank financial companies that it would like the council to designate as significantly important, in order to move fast once the council meets.

Conclusion

The council clearly has broad authority to subject nonbank financial companies to enhanced supervision under the Fed. Companies that may be designated as systemically important should closely monitor the meetings of the council to better understand how the council will operate and determine which companies could be subject to enhanced supervision. By monitoring statements from the council, nonbank financial companies will be in a better position to gauge the potential chances of designation as systemically important companies and to prepare for such a possibility.

Studies and rulemakings

Membership

The council will consist of federal and state regulators and have a total of 10 voting members, including the secretary of the Treasury, and five nonvoting members.

  • Chairperson: the secretary of the Treasury

References

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