IIF Authors

Status: Will be live at 05/10/2019 14:45

IIF responds to FSOC proposal on nonbank systemic risk designation

The IIF has submitted a response letter to the U.S. Financial Stability Oversight Council (FSOC), which is chaired by the U.S. Treasury, regarding their proposed interpretative guidance on the supervision and regulation of certain nonbank financial companies.

Under the proposed interpretive guidance, FSOC would prioritize an activity-based approach (ABA) when identifying and addressing potential risks to U.S. financial stability in non-banking areas, including insurance and asset management. 

The IIF noted that the proposed guidance is a welcome development in the ongoing pivot from an entity-based approach (EBA) to an ABA, which represents a broader view of the financial markets and the full range of available responses to any systemic risks that do arise. The pivot to the ABA aligns with the FSOC’s statutory purposes and with current global approaches to systemic risk, including those underway at the Financial Stability Board and IOSCO, regarding Asset Management and the IAIS around systemic risk in Insurance. 

The ABA permits the consistent treatment of activities across sectors, reducing fragmentation, providing a level playing field, and promoting financial stability. The broader view of potential risks and responses under the ABA also serves to minimize the potential for competitive distortions that is present in the EBA and addresses other acknowledged flaws of the EBA. The IIF letter offered specific observations on why the ABA is the correct approach to address systemic risk in the asset management and insurance industries. The IIF also offered 19 recommendations for enhancements to the proposed guidance.