Back to Basics or Back to 2008? FSOC’s Regulatory Reversal
The FSOC is set on a new path, dismantling key post-crisis oversight measures and signaling a major shift in the U.S. approach to financial risk and regulation.
The FSOC is set on a new path, dismantling key post-crisis oversight measures and signaling a major shift in the U.S. approach to financial risk and regulation.
The Financial Stability Oversight Council (FSOC) is charting a new path. It has announced a series of policy changes. They mark a significant break from the post-2008 financial crisis regulatory framework. The goal is to prioritize economic growth over what officials see as overly burdensome rules.
A major shift is the review of guidance on nonbank financial company determinations. The Dodd-Frank Act gave the FSOC the power to designate these firms as systemically important financial institutions (SIFIs). A SIFI designation puts a firm under the direct supervision of the Federal Reserve.
Treasury Secretary Scott Bessent said the council will use “more tailored and precise” tools. He wants to move away from singling out individual institutions for what he called “burdensome” bank-style regulations. This is a return to an “activities-based” approach. FSOC will now focus on risks posed by specific financial activities across the market, rather than risks from individual firms.
Proponents of this change, including industry trade groups, argue that it will reduce costs and create a competitive disadvantage for nonbanks. They say the previous guidance was too broad. It made it easy to designate firms for speculative or non-material risks. Critics, like consumer advocacy group Better Markets, argue that this decision is a “dereliction of duty.” They warn that it leaves the financial system vulnerable to another crisis, especially from the large and unregulated shadow banking sector.
Another key change is the elimination of the FSOC’s climate risk panels. The council voted to rescind the charters of its Climate-Related Financial Risk Committee and Advisory Committee. This dismantles a multi-year effort to formally integrate climate change into financial regulation.
The previous administration had focused on the financial risks from climate change. This included physical risks from extreme weather and transition risks from the move to a green economy. The FSOC had even published a 133-page report on the issue.
Bessent said this move is part of a “back to basics” approach. He wants the FSOC to focus on what he considers its core mission: protecting financial stability and promoting economic growth. Critics, however, say this disregards years of data and fact-based analysis. They warn that the council is now ignoring a major long-term threat to financial stability.
The new direction at the FSOC is not happening in a vacuum. Other key regulators are making similar changes. Comptroller of the Currency Jonathan V. Gould stated that the OCC will review its entire post-2008 regulatory and supervisory framework. He said the old rules aimed to “micromanage” banks and reduced examinations to “procedural box-checking.” Gould also said the OCC would no longer have a “de facto ‘no’ policy” on new bank charters and mergers.
Similarly, FDIC Acting Chairman Travis Hill said the agency is working to make supervision “less process-driven and more focused on core financial risks.” This includes reforming the CAMELS rating system. The goal is to give banks greater flexibility in risk management.
These changes are meant to foster innovation and competition. They aim to unleash the banking system to better support economic growth. However, critics are concerned that this broad-based deregulation could create the very same conditions that led to the 2008 financial crisis.