Ginny Cleaveland, Deputy Press Secretary, Federal Communications, Sierra Club, ginny.cleaveland@sierraclub.org, 415-508-8498 (Pacific Time)
WASHINGTON, DC — The Financial Stability Oversight Council (FSOC) today published its final guidelines on two proposals: an analytical framework that strengthens FSOC’s toolbox for addressing threats to financial stability, including those related to climate change, and guidance that makes it easier for FSOC to designate nonbank companies as systemically important institutions that need enhanced regulation.
The guidance explains how FSOC will make determinations about whether nonbank financial institutions — asset managers, insurance companies and others operating outside the federal regulatory framework set up for chartered banks — will be placed under supervision of the Federal Reserve Board. These determinations, known as Systemically Important Financial Institution (SIFI) designations, are a critical feature of the 2010 Dodd-Frank Act enacted following the 2008 financial crisis. During that crisis, many key contributors to financial instability were nonbanks.
The analytical framework will help FSOC and financial regulators identify, assess, and respond to potential risks to U.S. financial stability. This framework will be an invaluable tool for FSOC in the SIFI designation process.
The Sierra Club, which submitted multiple comment letters during the council’s comment period on the proposals earlier this summer, applauded the new guidance and analytic framework.
“FSOC’s announcement is welcome news. As FSOC acknowledges, climate change is one of the most serious emerging risks to financial stability, and it is a risk being driven by the financing of fossil fuel expansion. Despite this, most of the nonbanks providing large-scale finance for fossil fuel expansion are not subject to oversight for their contributions to financial instability. FSOC now has the tools it needs to investigate nonbanks, such as giant asset managers like BlackRock and Vanguard, to determine whether they are destabilizing our financial system and warrant designation and Fed oversight,” said Jessye Waxman, Senior Campaign Strategist with the Sierra Club’s Fossil-Free Finance campaign.
The guidance includes important provisions such as:
- Elimination of arbitrary roadblocks to designation put in place in 2019, such as requirements to undertake cost-benefit analysis and to assess the likelihood of a firm’s material financial distress. The Dodd-Frank Act has no cost-benefit requirement and clearly contemplates that high-risk activities of a nonbank financial firm can justify a SIFI designation, regardless of likely financial distress.
- Reference to the substantive criteria that FSOC will rely upon (the new analytic framework) in making designations, an essential measure for enhancing transparency and providing fair notice to nonbank financial firms facing potential designation.
COMMENT LETTERS
In July 2023, the Sierra Club joined a coalition of advocacy groups in submitting comments to FSOC on these two proposals, including a shorter comment letter signed by 25 advocacy groups and a longer comment letter submitted by Americans for Financial Reform Education Fund, Public Citizen, Sierra Club, and Sunrise Project.
The letters detailed how threats to financial stability from nonbank financial institutions are growing, and encouraged FSOC to quickly strengthen and finalize its proposals to be able to respond effectively and proactively to emerging risks. The letters outlined how many nonbank financial institutions already face heightened stress from large climate-related shocks, including several major insurers’ decisions to withdraw coverage from many states and zip codes.
The letters also discussed how insurance companies, asset managers, private equity firms, and other nonbank financial institutions are also creating significant risks to the financial system through their insured or financed emissions — risks that are often forced upon other financial institutions and consumers who will struggle to manage them.
MOVE FOLLOWS OTHER AGENCIES
The announcement from FSOC comes the week after the Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) announced interagency guidance on principles for climate-related risk management for large financial institutions. This was the first intervention from U.S. regulators intended to protect the financial system from climate-related risks.
Also, last month, the U.S. Department of the Treasury published its own principles for financial institutions’ net-zero transition plans. This was the first time a major U.S. government agency provided any guidance to the financial sector on the development and implementation of net-zero transition plans.
About the Sierra Club
The Sierra Club is America’s largest and most influential grassroots environmental organization, with millions of members and supporters. In addition to protecting every person's right to get outdoors and access the healing power of nature, the Sierra Club works to promote clean energy, safeguard the health of our communities, protect wildlife, and preserve our remaining wild places through grassroots activism, public education, lobbying, and legal action. For more information, visit www.sierraclub.org.