MBA Comments on FSOC’s Proposed SIFI Designation Guidance

The Mortgage Bankers Association commented on the Financial Stability Oversight Council’s proposed revision to its guidance related to the designation of non-bank financial companies as systemically important financial institutions, as well as the proposed analytic framework FSOC would use to examine potential risks to the financial stability of the United States.

“MBA supports FSOC’s goal to ensure healthy and stable financial markets, however as further outlined below, MBA recommends FSOC incorporate several improvements to the proposal and the framework when considering designation of a non-bank financial firm as a SIFI,” the comment letter said.

MBA suggested that the Financial Stability Oversight Council:

-Include consideration of the costs and benefits of non-bank SIFI designation;

-assess systemic risk, consider and address whether existing regulations are driving core banking activities outside the banking regulatory perimeter;

-Before proceeding with designation, look first to the tools of existing regulatory entities and other federal programs/agencies; and

-In pursuing designation, adhere to statutory process requirements.

The letter suggested that in proceeding with a non-bank SIFI designation, FSOC should conduct a deep and thorough analysis, including weighing the cost and benefit of such designation to the U.S. financial system as a whole and the likelihood the financial company in question will experience material financial distress as a result of the designation.

“To the extent that FSOC is concerned with core banking activities taking place outside of the established ‘regulatory perimeter’ of prudential bank regulation, FSOC should reconsider the regulatory environment that has discouraged traditional depository institutions from competing in the space,” the comment letter said. “As a general matter, FSOC should consider less costly alternatives to designation of a non-bank financial entity – especially where such an entity is already subject to regulation by an FSOC-constituent member and the perceived risk to financial stability associated with that entity can be, or perhaps already has been, adequately addressed through targeted programmatic changes by that regulator.”

If the FSOC nonetheless determines that an entity designation is appropriate, MBA said it urges FSOC to impartially follow the statutorily-prescribed process and fact-finding exercise preceding designation without any predetermined outcome in mind. “Additionally, the decision to initiate a first-level review of a particular entity for potential designation should be made following a full vote of FSOC members,” the letter said.