New federal guidance will restore and strengthen oversight of non-bank financial institutions

Ceres today welcomed the finalization of new guidance from the Financial Stability Oversight Council (FSOC) that would enhance the supervision and regulation of certain non-bank financial institutions (NBFIs) that play a pivotal role in strengthening the financial ecosystem. Ceres also welcomed the finalization of the Analytic Framework for Financial Stability Risk Identification, Assessment, and Response. 

Among the important features of the Interpretive Guidance on Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies:  

• Eliminates obstacles to supervision of NBFIs put in place in 2019, such as the requirement to assess the likelihood of a firm’s material financial distress. The guidance clarifies that a NBFI’s high-risk activities can justify its designation as “systemically important,” regardless of likely financial distress. 

• Establishes the criteria on which the FSOC will rely in making designations. These criteria, set forth in the Analytic Framework, will provide NBFIs facing potential designation with clear signals about risk reduction measures that may be needed to avoid federal supervision.

• Clarifies that the FSOC’s Systemic Risk Committee is responsible for regular monitoring and reporting about NBFIs that may pose a risk to financial stability. 

“We fully support the finalized FSOC guidance and analytic framework," said Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets at Ceres. “Many large non-bank financial institutions are failing to adequately prepare for the rapid decarbonization of the US economy and intensification of physical and transition climate impacts. This new guidance will allow for an easier designation of these institutions as systemically important, ensuring that the Federal Reserve can supervise and enforce safety measures before they can cause widespread and long-lasting harm to our financial system.” 

Earlier this year, Ceres sent submitted comments to the FSOC on the proposed guidance on Systemically Important Financial Institution (SIFI) determinations for NBFIs and the proposed financial stability analytic framework. The full comment submission can be viewed here. 

Ceres is a nonprofit organization working with the most influential capital market leaders to solve the world’s greatest sustainability challenges. The Ceres Accelerator for Sustainable Capital Markets is a center of excellence within Ceres that aims to transform the practices and policies that govern capital markets to reduce the worst financial impacts of the climate crisis. It spurs action on climate change as a systemic financial risk—driving the large-scale behavior and systems change needed to achieve a net zero emissions economy through key financial actors including investors, banks, and insurers. The Ceres Accelerator also works with corporate boards of directors on improving governance of climate change and other sustainability issues. For more information, visit ceres.org and ceres.org/accelerator and follow @CeresNews.