The Financial Stability Oversight Council (FSOC) gave approval to a new analytic framework for monitoring financial stability risks on Nov. 3rd. The novel structure also provides guidance regarding the process of determining nonbank financial company categorizations, with a primary focus on risk evaluation and mitigation.
"FSOC votes on new analytic framework to help with financial stability risks," announced the Council. This action represents an initiative to strengthen their ability to detect and respond effectively to potential financial threats.
According to a press release by the U.S. Department of the Treasury, this analytical apparatus will be capable of discerning whether stability risks originate from activities spanning across multiple firms or from individual entities. "Financial stability is a public good, and we need a robust structure to monitor and address the build-up risks that could threaten the financial system," Secretary of the Treasury Janet L. Yellen said. She added that Congress had created FSOC post-global financial crisis specifically for identifying and responding aptly to potential hazards threatening economic equilibrium.
This approach towards risk assessment relies heavily on engagement and transparency during a company's review process, even including companies' existing primary financial regulators when applicable. Determinations are made based on data-driven analyses examining various aspects of the subject company, including its market stance and existing regulations.
A two-stage protocol is employed when assessing if nonbank financial firms should come under Federal Reserve supervision. Initially, companies undergo preliminary analysis using available information; subsequently, in-depth engagement with them occurs alongside consultation with their main regulatory bodies.
The approval comes as an enhancement tool improving FSOC’s capacity in managing potential threats to financial stability while simultaneously promoting increased transparency for public interest. Under this analytic framework, FSOC will supervise numerous asset classes along with activities ranging from debt markets and central counterparts to banking institutions as well as nonbank establishments. Should any potential risks be discovered by FSOC, details would be made public through annual reports or other published statements.