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Thursday, May 17, 2012

Identifying Systemically Important Nonbank Financial Companies

At the House Financial Services Committee meeting yesterday Treasury’s Deputy Assistant Secretary Lance Auer discussed the Financial Stability Oversight Council’s (FSOC) rule and guidance for identifying nonbank financial companies that will be subject to enhanced prudential standards and supervision by the Federal Reserve.

The Dodd-Frank Act requires FSOC to assess a minimum of ten considerations when evaluating nonbank financial companies in order to assess the potential impact of a company’s financial distress on the broader economy: size, interconnectedness, and substitutability, as well as to assess the vulnerability of a company to financial distress: leverage, liquidity risk and maturity mismatch, and existing regulatory scrutiny.

Lance noted the FSOC “will approach each determination using a consistent framework, but ultimately each designation must be made on a company-specific basis.”

Lance also discussed the FSOC’s interpretive guidance which explains the three-stage process that will be used in assessing nonbank financial companies:
  • Stage 1: FSOC will apply uniform quantitative thresholds to identify those nonbank financial companies that will be subject to further evaluation.
  • Stage 2: FSOC will analyze the nonbank financial companies identified in Stage 1 using a broad range of information available primarily through existing public and regulatory sources.
  • Stage 3: FSOC will contact each nonbank financial company that it believes merits further review to collect information directly from the company.
Read Lance’s full testimony.
Read more about the HFS hearing.

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