Changes to "Too Big to Fail" Treasury Recommends Revisions to Dodd-Frank SIFI Designation Process for Non-Banks (Part 2) Page: 2 of 3
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On the other hand, defenders of FSOC have argued that the "malleable standard[s]" FSOC applies in
deciding whether to designate companies as SIFIs effectively deter companies from seeking out
systemically risky activities. According to these commentators, the adoption of precise mathematical
formulas for distinguishing between safe and risky companies would encourage companies to seek out
activities with risks that are not adequately reflected in such rigid standards. They contend that vesting
FSOC with "broad discretion" to designate firms as SIFIs is appropriate given the inherent difficulty of
identifying systemic risks and the perils of failing to identify such risks.
Treasury's Recommended Changes
The Treasury Department's latest Report outlines four general recommendations for changing the SIFI
designation process for non-bank financial companies. First, the Report recommends that FSOC adopt an
"activities-based" or "industry-wide" approach to assessing potential risks posed by non-banks. Under
this approach, FSOC would prioritize identifying specific financial activities and products that could pose
risks to financial stability, work with the primary financial regulatory agencies to address those specific
risks, and consider individual firms for designation as SIFIs only as a matter of last resort if more limited
actions aimed at mitigating discrete risks are insufficient to safeguard financial stability.
Second, the Treasury Department recommends that FSOC "increas[e] the analytical rigor" of its
designation analyses. Specifically, the Report recommends that FSOC: (1) consider any factors that might
mitigate the exposure of a firm's creditors and counterparties, (2) focus on "plausible" (and not merely
"possible") asset liquidation risks, (3) evaluate the likelihood that a firm will experience financial distress
before evaluating how that distress could be transmitted to other firms, (4) consider the costs and benefits
of designations, and (5) collapse its three-stage review process into two steps-notifying companies that
they are under active review during Stage 1 and voting on proposed designations after the completion of
Third, the Treasury Department recommends enhancing engagement between FSOC and companies under
review and improving the designation process's transparency. Specifically, the Report recommends that
FSOC: (1) engage earlier with companies under review and "explain ... the key risks" that FSOC has
identified, (2) "undertake greater engagement" with companies' primary financial regulators, and
(3) publicly release explanations of its SIFI designation decisions.
Fourth, the Treasury Department recommends that FSOC provide "a clear off-ramp" for non-banks
designated as SIFIs. Dodd-Frank mandates that FSOC re-evaluate its designations annually, allowing the
agency to rescind a designation if it determines by a two-thirds vote that includes the Secretary of the
Treasury that the company no longer meets the standards for designation. The Treasury Department
recommends that FSOC: (1) as an initial matter, highlight the key risks that led to a company's
designation, (2) "adopt a more robust and transparent process for its annual reevaluations" that "make[s]
clear how companies can engage with FSOC ... and what information companies should submit during a
reevaluation," (3) "develop a process to enable a designated company to discuss potential changes it could
make to address the risks it could pose to financial stability," and (4) "make clear that the standard it
applies in its annual reevaluations is the same as the standard for an initial designation of a nonbank
The Treasury Department's recommendations may prove significant if and when the Senate considers the
Financial CHOICE Act of 2017, which passed the House of Representatives in June. Among other
Congressional Research Service
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Sykes, Jay B. Changes to "Too Big to Fail" Treasury Recommends Revisions to Dodd-Frank SIFI Designation Process for Non-Banks (Part 2), report, December 1, 2017; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc1094470/m1/2/?q=%22law%22: accessed April 24, 2019), University of North Texas Libraries, Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.