WASHINGTON — The Treasury Department detailed its vision Friday for how and when federal agencies should use their powers to subject nonbanks to enhanced regulatory scrutiny.

The 68-page report calls on the interagency Financial Stability Oversight Council, which Treasury Secretary Steven Mnuchin chairs, to prioritize activities-based or industrywide designations rather than singling out individual firms.

It also called on the FSOC to revise its approach to designating risks in several ways, such as by formally requiring a cost-benefit analysis of any designation, amending its assessments for the transmission of risk and asset liquidation to be “more rigorous, clear, and comprehensible,” and involve any companies in question earlier during the designation process.

Treasury Secretary Steven Mnuchin
"In our recommendations we identify several ways to improve FSOC’s processes for designating nonbanks and financial market utilities," said Treasury Secretary Steven Mnuchin. Bloomberg News

Additionally, the report suggests a few structural changes to the designation process. The Treasury said the FSOC should reduce the number of predesignation review stages from three to two, and asked Congress to extend the statutory deadlines for companies under consideration for designation to 60 days from 30, and for the council to make a final determination after such a hearing to 90 days from 60.

"In our recommendations we identify several ways to improve FSOC’s processes for designating nonbanks and financial market utilities," Mnuchin said.

Treasury developed the report as part of President Trump’s April 21 executive order calling for a review of the FSOC’s process for designating nonbank firms as systemically important financial institutions. That order asked the Treasury to review several aspects of the designation process, including whether the designation processes were sufficiently transparent, whether the council appropriately considered costs and what recommendations it would make to Congress to change the statutory authorities related to nonbank designation.

In addition to its discussions on the processes for nonbank SIFI designation, the report also discusses changes the council should make to its designation of financial market utilities — market intermediaries like derivatives exchanges and clearinghouses.

Those changes were fairly minor, however, suggesting that the FSOC should ensure that the financial market utility designation process is appropriately tailored and calling for further study of issues related to designation, operation and resolution. There are eight designated financial market utilities, though the designation process has been a source of concern for some congressional Republicans in recent months.

The FSOC had at one time designated four firms as SIFIs — the insurance companies American International Group, Prudential and MetLife, as well as GE Capital. GE Capital had its designation rescinded in April 2015, and MetLife fought its designation in court, arguing that the council violated its own rules in designating the insurer and failed to make a plausible case that the company posed a threat of default.

That lawsuit has been wending its way through the court system and the political process for the last two years. In March 2016, a lower court agreed with the company, striking down MetLife’s SIFI label and sparking a prolonged appeals process that ultimately landed before the D.C. Circuit later that year.

During oral arguments, judges on the appellate panel appeared more skeptical of MetLife’s argument than the lower court, but the case was tabled in April pending the new administration’s review of the SIFI designation process. Lawmakers have called on the FSOC to drop its side of the suit — thus effectively letting the lower court ruling stand — but the case remains pending, possibly because of a lack of agreement among members of the council.

That is ostensibly where the matter still stands. The case was held in abeyance through Nov. 17 — the day the report was issued — or until 30 days after the Treasury secretary issued a report on its policy toward nonbank SIFI designation, whichever comes first.

The FSOC held its first open meeting Thursday since President Trump’s inauguration, though the interagency council has held several closed meetings this year. No mention was made of the report, however, or the pending MetLife lawsuit.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.