FSOC’s Proposed Guidance on Nonbank Designations Undermines its Ability to Address Systemic Risk
WASHINGTON, D.C. — If a proposal by the Financial Stability Oversight Council (FSOC) is implemented, the Council will erode its authority to protect the financial system from large nonbank financial companies like insurance companies, nonbank mortgage lenders, and private equity and credit firms, according to documents submitted today by Public Citizen, Americans for Financial Reform Education Fund, and Sierra Club.
In the 2000s, several large and interconnected firms, including insurance giant AIG, contributed to the destabilization of the financial system and triggered a global economic crisis. In response, Congress established the Financial Stability Oversight Council and gave it authority to designate nonbank financial companies (NFCs) as systemically important, placing them under enhanced federal regulatory supervision. The Council’s proposed guidance seeks to weaken its designation authority.
In their comment, Public Citizen, Americans for Financial Reform Education Fund, and Sierra Club argue that eroding FSOC’s designation authority increases the likelihood that threats to U.S. financial stability—including threats from climate change—will go unaddressed. The move emboldens NFCs to increase risk taking by removing the specter of enhanced supervision and risks putting the public on the hook for firm bailouts.
“Many of the firms most exposed to climate-related financial risk already enjoy a lax regulatory environment and limited federal oversight,” said Elyse Schupak, policy advocate with Public Citizen’s Climate Program. “Rather than weakening one of the only federal regulatory tools to address financial stability threats from outside of the banking system, FSOC should use its existing authority to designate large, interconnected, and risky property insurers, nonbank mortgage lenders, and other firms exposed to the impacts of climate change and creating risks for other financial institutions, communities, and the broader economy.”
“While climate change is destabilizing the financial system and hurting people and communities, FSOC is weakening its own tools that could be used to monitor and address this growing crisis,” said Alex Martin, climate finance policy director at Americans for Financial Reform Education Fund. “Increasing climate impacts are contributing to a loss of access to affordable property insurance, rising risks to lenders, and creating financial devastation for households who are falling behind on their bills and mortgage payments and facing higher credit card debt. FSOC has a public responsibility to use all tools available to monitor and address growing climate risks to property insurance.”
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