The U.S. Department of the Treasury in late November reviewed the Financial Stability Oversight Council’s (FSOC) processes for non-bank financial companies, and financial market utilities (FMUs) regarding Systemically Important Financial Institution (SIFI) designations. The Treasury report suggests that the heavy focus on SIFI designations was a mistake, and that FSOC should focus on activities-based risks industry-wide.1 The report outlined five policy goals for FSOC processes:2

  1. Focus on industry activities and practices that could pose risks to the financial stability of the U.S.
  2. Enhance coordination with primary financial regulators to mitigate systemic risks. Individual firms should only be considered for SIFI designation after consultation with that firm’s primary regulator.
  3. Reform its designation analyses to include an assessment of the likelihood of a firm’s material financial distress.
  4. Improve engagement with firms under review, and with their primary regulators, and improve transparency to the public concerning the designation process, and the basis of its determinations.
  5. Provide a clear “off-ramp” for designated non-bank financial firms and FMUs allowing them to develop and submit a risk mitigation plan. This would enhance the stability of the financial system.


What this means

The pivot away from the SIFI designation and towards an activities-based or industry-wide risk identification means the Treasury recommends that FSOC should not single out individual firms purely on the basis of size.3 In addition to the five policy goals, Treasury suggests the implementation of a number of measures on the part of FSOC to make the SIFI designation process fairer and more transparent. These include:4

  1. Cost-benefit analysis.
  2. Revisions to the risk exposure assessments and more rigorous, clear and comprehensible asset liquidation assessments.
  3. Improved communications with non-bank financial firms and FMUs under review and their primary regulators earlier in the designation process.

Taken together these measures would make the SIFI designations less frequent, more transparent, and when they occur, key to financial stability.5 Specific to non-bank financial institutions and FMUs is the recommendation to tailor any designations to individual firms, and to take into consideration a firm’s likelihood of material stress.6 A key point that the Treasury Report makes is that the over focus on SIFI designations has led to an under focus on other areas of risk, and that FSOC should direct its attention to activities and products, rather than size, in its efforts to identify the underlying sources of risks to financial stability.7



Ironically, the  Treasury Departments current view of how FSOC should fulfill its mission may be closer to how the Obama Administration originally conceived FSOC’s role.8 It is also in line with the first Treasury Report in June, which recommended an expansion of the FSOC’s authority to play a larger role in the coordination and direction of regulatory and supervisory policies, and giving it the authority to appoint a lead regulator on issues where multiple regulatory agencies may have conflicting and duplicitous jurisdiction.9 This focus on coordination between the regulatory agencies, encourages FSOC to propose changes in policy and promote a regulatory reform agenda which avoids conflicts between multiple agencies with overlapping jurisdiction. Even without Congressional support to appoint a lead regulator, adopting the Treasury recommendations could give FSOC substantial influence over regulatory and policy direction.10



  1. “Treasury’s Recommendation for FSOC: No CHOICE but to Play Double Duty,” Davis Polk, November 20, 2017. Access at:
  2. “FSR Welcomes Treasury Report on FSOC Designations,” Financial Services Roundtable, November 20, 2017. Access at:
  3. “Treasury’s Recommendation for FSOC: No CHOICE but to Play Double Duty,” Davis Polk, November 20, 2017. Access at:
  4. Ibid
  5. Ibid
  6. “Treasury Makes Recommendations on FSOC Designation Processes,” Center for Financial Stability, November 21, 2017. Access at:
  7. “Treasury’s Recommendation for FSOC: No CHOICE but to Play Double Duty,” Davis Polk, November 20, 2017. Access at:
  8. Ibid
  9. Ibid
  10. Ibid


Newsletter Author: Venetia Woo, Mairi Bryan

Newsletter Contact Person: Venetia Woo

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