Treasury calls on regulators to focus on risky financial practices, not firms

The Treasury Department said Friday that regulators should move away from a controversial framework established by the Dodd-Frank Act to police financial sector risk.

Treasury called on the Financial Stability Oversight Council (FSOC) to avoid targeting nonbank financial firms by size and instead focus on the riskiest practices across the financial sector.

Treasury Secretary Steven Mnuchin the interagency group of financial regulators should limit “systemically important financial institution” (SIFI) designations and stop targeting firms by size.

“In our recommendations we identify several ways to improve FSOC’s processes for designating nonbanks and financial market utilities,” said Mnuchin, who chairs FSOC.

“Our recommendations include enhancing FSOC’s analytic process, implementing cost-benefit analysis, and increasing transparency.”

The policy is major victory for insurance companies and nonbank firms who’ve long protested Dodd-Frank rules applied to firms with more than $50 billion in assets. FSOC can decide to designate any nonbank financial firm as a SIFI, which subjects it to stringent capital requirements and stress tests.

Mnuchin said that FSOC should provide designated SIFIs with a clear process to lose that label, and that the board should avoid applying the label in all but extreme circumstances.

The memo called on FSOC to “prioritize its efforts to address risks to financial stability through a process that emphasizes an industry-wide or activities-based approach.”

This includes recommendations to address risky practices with a firm’s primary regulator, run a cost-benefit analysis before designating a firm and “only designate a company if the expected benefits to financial stability outweigh the costs of designation.”

The Treasury Department previously called for fundamental changes to the way federal agencies regulate insurance companies, calling for a move away from regulating insurance companies based on size to a focus on risky activities.