Bloomberg News
The Financial Stability Oversight Council’s approach to systemic risk posed by nonbanks is unlikely to make a significant course correction in the next Trump administration, experts say, with the focus remaining on activities-based rules rather than individual firm designation.
Mark Calabria, former director of the Federal Housing Finance Agency and a member of FSOC, said that despite the Biden administration’s stated interest in subjecting large nonbanks to heightened supervision, no entities were designated as systemically important financial institutions — a designation that brings with it additional banklike prudential supervision by the Federal Reserve — during the Biden years. This, he notes, could mark a rare area of continuity between the Biden and Trump administrations.
“I would be surprised in a Trump administration whether entity designations come back,” he said. “I do think it’s a bit ironic, in my opinion, that the last big [FSOC] report was on nonbank servicing — it really was an activities based report, not an entity based report — despite some of the complaints by Yellen and others about an activities based approach. [So] you certainly can ask the question: Are entity level designations a thing of the past?”
Some, like Davis Polk lawyer David Portilla, think the Trump administration will go a step further and favor nonbanks when compared with prior administrations.
“Under the Trump administration, I think you’ll likely see less scrutiny of the nonbank sector,” said Portilla. “Perhaps even more support for the nonbank sector and private capital, representing a shift from the current administration’s intense scrutiny of this area.”
The Financial Stability Oversight Council — which was created under the Dodd-Frank Act — has the power to designate nonbank financial institutions as SIFIs if the body determines that their failure could destabilize the U.S. economy. The council is led by the Treasury secretary, and the heads of key regulatory bodies — including the Federal Deposit Insurance Corp., Federal Reserve, Securities and Exchange Commission and others — make up its membership.
Under the Obama administration, FSOC designated insurance giants AIG, Prudential and MetLife — as well as GE Capital — as systemically important due to their size, leverage and interconnectedness. But MetLife sued FSOC over its designation and won, arguing that the council had not proven the firm was likely to fail before designating it. GE Capital and AIG restructured themselves in order to shed their SIFI designations, and the FSOC under the first Trump administration de-designated Prudential in its early days.
Portilla notes that one of the consequences of designation is that it incentivizes companies to change their structure to escape the heightened scrutiny.
“The prior process demonstrated that designation is indeed a severe tool, and once designated, companies tend to be dynamic, often taking actions to be de-designated,” noted Portilla. “At the same time, the current administration has been clear that entity-level designation is not necessarily the preferred tool, but one they believe should be available.”
Treasury Secretary Janet Yellen has since expressed concern that further deregulation under Trump could threaten financial stability by weakening FSOC’s tools to identify and mitigate systemic risk.
Nevertheless, consumer advocate Shayna Olesiuk, director of banking policy at Better Markets, believes nonbanks — which hold hundreds of trillions in assets and provide substantial capital to the banking system — remain a serious risk, and that despite the attempts to rein them in under the Biden administration, FSOC has yet to quell the risks they pose.
“Nonbanks have continued to grow, becoming not only bigger threats to financial stability and the American people but also more complex and interconnected with banks,” said Olesiuk, who spent over two decades at the Federal Deposit Insurance Corp. “Despite nonbanks being large and deeply interconnected with the banking system, there is insufficient reporting, transparency and regulatory oversight of their activities.”
FSOC — which consists of over a dozen federal financial regulators, 10 of which have voting power — has been constrained by limited statutory authority compared to other regulators and the challenge of garnering consensus among its myriad of members.
To complicate things further, FSOC’s budget and authority were also slashed during the Trump administration, which erected hurdles to designation processes and reversed some regulatory decisions. Portilla notes that the first Trump administration largely agreed with Republican-led critiques of the body as opaque and arbitrarily punitive toward nonbanks.
“I think the designation process has been criticized for lacking transparency and for creating competitive distortions on an uneven playing field,” said Portilla. “The Trump administration was responsive to those critiques and revised it for that reason.”
The Biden administration in 2023 reversed Trump-era policy that limited FSOC’s authority, allowing it to impose stricter oversight on firms deemed critical to the financial system’s stability and attempted to address concerns about transparency by clarifying the panel’s process for assessing systemic risk and providing procedural protections for companies under review.
Olesiuk says she applauded FSOC’s attempts to provide a clear path for FSOC action to reduce systemic risk, but that the next administration could throw up additional regulatory hurdles to designating individual firms.
“Funding and staffing cuts sent a clear message about the Trump administration’s view of the FSOC,” she noted. “Without question, reducing resources limits the FSOC’s ability to do its job … [and] given the historical record, we are likely to see similar cuts in the next administration.”
Calabria said the topics of the quarterly meetings — which, in his experience, focused heavily on climate risk — will likely shift dramatically.
“Certainly the most dramatic change will be that climate will not be the number one issue for FSOC anymore,” he said “That’ll be a night-and-day [difference in] approach toward that.”
But, Calabria noted, aside from the Obama-era designations, the panel has not made dramatic changes in its approach from one administration to the next.
“You could read FSOC reports from Obama, Trump, Biden, and the interesting thing is how much those reports have in common,” he noted. “Some of that is a lot of the Treasury and Fed staff that drive that process don’t leave, but again, some of it is institutional perspectives of the members as well.”
Calabria added that while the next administration has made its deregulatory designs clear, questions remain about how much of Trump’s more recent populist rhetoric — reflected in support for crypto and his tapping Vice President-elect J.D. Vance to be his running mate — will actually translate to loosening restrictions on nontraditional financial entities.
Populist skepticism of concentrated power in the financial system — particularly when such skepticism is bipartisan — is something to watch according to Calabria.
“A great example of this — if you want to go full horseshoe [theory] in financial services — is to look at the degree to which Rohit Chopra and Jonathan McCartan have worked together on asset managers’ potential control of banks,” he said. “And so while I would not expect, say, a designation of Black Rock or PIMCO, it’s certainly not out of the question that those are entities that receive scrutiny.”
Trump’s choice for Treasury secretary will provide some clarity around his administration’s regulatory direction, as this pick will ultimately shape the panel’s agenda.
“FSOC is politically responsive, perhaps more so than some other financial regulators,” said Portilla. “We’ll have to wait and see who the Treasury secretary and the Federal Reserve chair will be over the course of the administration … but I think, inevitably, FSOC’s direction will reflect the priorities of President Trump.”
Scott Bessent, a hedge fund veteran, is reportedly the leading candidate under consideration to become Treasury secretary in the next Trump administration. His significant Wall Street experience — and bent for loosening regulations — suggests he would not view heightened regulation for nonbanks as a top priority.
Portilla says, as a general rule, Republicans in Washington tend to disfavor FSOC being particularly active.
“There’s a high bar for designation under the current administration,” he noted. “And likely an even higher bar under a Republican administration, barring some crisis.”
Calabria believes that financial regulation could take a backseat in the next administration, citing a lack of public demand for it.
“It was a nonissue during the election … so no one’s going to do a Dodd-Frank, and unlike, say, 2018, no one’s going to do a Dodd-Frank modification Bill either, so I just don’t see financial regulation [being in] the top five issues with the Treasury secretary,” he said. “They’ll have 10 other things that they view as a higher priority for 2025, and so FSOC kind of ends up being a back burner. That’s where I would bet.”
