Climate, public interest advocacy groups propose clear guidelines to better regulate nonbank financial institutions that threaten financial stability
WASHINGTON, DC — A coalition of advocacy groups today submitted multiple comment letters to the Financial Stability Oversight Council (FSOC) on two proposals that would strengthen its toolbox for addressing threats to financial stability, including those related to climate change, and make it easier to designate nonbank companies like asset managers and insurance companies as systemically important institutions that need enhanced regulation by the Federal Reserve Board. The comment periods on the proposals close on July 29.
- Read the shorter comment letter signed by 25 advocacy groups here
- Read the longer comment letter submitted by Americans for Financial Reform Education Fund, Public Citizen, Sierra Club, and the Sunrise Project here
- Read the petition signed by 12,224 people and submitted by Americans for Financial Reform and Public Citizen here
The letters detail how threats to financial stability from nonbank financial institutions are growing, and it encourages FSOC to quickly strengthen and finalize its proposals to be able to respond effectively and proactively to emerging risks. Many nonbank financial institutions already face heightened stress from large climate-related shocks, including several major insurers’ recent decisions to withdraw coverage from many states and zip codes. 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.
“Large nonbank financial institutions are heavily connected to other financial entities throughout the United States and globally, and yet the current regulation of these entities does not clearly maintain their safety and soundness, is not always transparent, and in some cases is virtually nonexistent. Additionally, many nonbanks carry out activities in a non-transparent manner further contributing to financial stability risk,” reads the comment letter. “By establishing a clear designation process, removing barriers to designation, and enhancing the public’s understanding of how FSOC will identify, assess, and address systemic risks more generally, the Proposed Guidance and Framework are critically important.”
The first proposal would update guidance on how FSOC makes determinations about nonbank financial institutions, and the process for subjecting those companies to additional supervision and standards. This proposed guidance replaces a 2019 guidance that advocacy groups characterize as deregulatory, erecting barriers that made it virtually impossible for FSOC to designate some companies as systemically important and require them to be supervised by the Federal Reserve.
The second proposal would establish an analytical framework to help FSOC identify, assess, and respond to potential risks to U.S. financial stability. Advocacy groups support the framework for its explicit mention of climate-related financial risk as a potential risk to financial stability and the acknowledgment that threats to financial stability could come from external sources and long-term vulnerabilities. In their comment, the groups also encourage improvements to the framework, including the need to expressly embrace a precautionary approach to proactively managing systemic risks that are highly uncertain and could cause high losses for the financial system.
The 25 advocacy groups that signed the shorter comment letter include: Americans for Financial Reform Education Fund, Climate Action California, Climate Reality Leader, Divest Washington, Earth Action, E3G, Friends of the Earth US, The Greenlining Institute, Green Party of Sacramento, Institute for Agriculture and Trade Policy, MARBE SA (Costa Rica), Micah Six Eight Mission, New York Communities for Change (NYCC), Oil & Gas Action Network, Revolving Door Project, Rise Economy (formerly California Reinvestment Coalition), The Phoenix Group, Positive Money US, Private Equity Stakeholder Project, Public Citizen, Sierra Club, Stand.earth, The Sunrise Project, Texas Campaign for the Environment, and 350 NYC.
QUOTES FROM ADVOCACY GROUPS
“A crucial part of FSOC’s mission is to address emerging threats to U.S. financial stability, and climate change clearly fits that bill,” said Alex Martin, Policy Director for Climate Finance at Americans for Financial Reform Education Fund. “If federal regulators monitor climate risks within the banking system only, they’ll be missing critical vulnerabilities and contributions in the nonbank system. A complete picture requires FSOC finalizing this update to its risk framework and reinstating a workable nonbank designation process.”
“For years, large financial institutions vital to our economy have avoided robust regulatory oversight, and, in the process, created risks that compromise the health of our financial system,” said Anne Perrault, finance policy counsel with Public Citizen’s Climate Program. “Large insurance companies, asset managers, and private equity firms, for example, have fueled climate-related financial risks through their financial relationships with the fossil fuel industry, and these risks now threaten financial stability. FSOC’s proposed guidance for designating nonbank financial companies for Federal Reserve oversight would provide a path to critically important — and overdue — supervision and regulation of these, and other, entities. This guidance and the analytic framework should be finalized as quickly as possible.”
“These proposed changes empower FSOC to act on its Congressionally-mandated objective to protect the financial system from new types of emerging financial stability risks — climate change key among them,” said Jessye Waxman, Senior Campaign Strategist at Sierra Club. “Given the long-term, irreversible, and non-linear impacts of the climate crisis, FSOC must quickly pass this proposed guidance and then move swiftly to regulate the financial institutions, including nonbanks, most responsible for driving these risks.”
“Insurance companies are insuring a fiery future while leaving vulnerable communities high and dry,” said Eren Can Ileri, financial regulation campaigner with the Sunrise Project. “They’re all about ‘coverage’ until it’s time to pay for the mess they helped create. If they won’t take climate action voluntarily, it’s time to regulate them.”
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