FSOC discusses its most powerful cudgel: Nonbank designation

WASHINGTON — The Financial Stability Oversight Council discussed one of its most powerful tools in a closed session on Friday, setting the stage for a potential resurgence in relevance for the group of financial regulators who saw their abilities severely undercut during the Trump administration. 

Guidance issued by the Trump administration effectively took away FSOC's ability to designate specific nonbank financial firms seen as a danger to the global markets, which would in turn subject them to banklike oversight. While Treasury Secretary Janet Yellen has suggested that she wants to overturn that guidance, she hadn't taken any public steps in that direction. 

But FSOC, the body of regulators established in the wake of the 2008 financial crisis to act as an early warning system for weaknesses in the financial system, heard a presentation from Treasury's staff on "options for assessing and responding to financial stability risks, including the process for designating nonbank financial companies for Federal Reserve supervision and prudential standards." 

Andrew Harrer/Bloomberg

A Treasury spokesperson declined to comment further. 

FSOC only ever designated four firms while it had the ability to do so, but all of them have since been taken off that list. 

Aside from Yellen, other financial regulators have hinted that they want to revisit the government's ability to designate nonbanks as systemically important. 

100 meetings in, has the Financial Stability Oversight Council found its footing?

Critics of the council say it hasn’t been as effective as it could be, but Treasury’s Nellie Liang said in an interview that right now it is “in a good place.”

""You can't ignore the risks in the nonbank sector; you've got to do what you can to regulate those risks," Fed Vice Chair for Supervision Michael Barr at an event hosted by the American Enterprise Institute in December. "That's one of the reasons, for example, in the Dodd-Frank Act, there was this process for designating things like financial market utilities, designating nonbank systemically important financial institutions to expand that perimeter, where needed, to be able to apply stricter rules so that you didn't have that migration of risk out of the banking system into a sector that was not fully regulated," Barr said at the time.