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1 1 (December 9, 2019)

handle is hein.crs/govbhww0001 and id is 1 raw text is: Researh Sevice Activities-Based Regulation and Systemic Risk Updated December 9, 2019 Past financial crises have shown that systemic risk can emanate from financial firms or activities. It can be caused by the failure of a large firm (hence, the moniker too big to fail) or it can be caused by correlated losses among many small market participants. Although historical financial crises have centered on banks, nonbank financial firms were also a source of instability in the 2007-2009 crisis. The 2010 Dodd--Frank Act (P.L. 111-203) enhanced the regulation of certain financial firms and activities to reduce systemic risk, particularly prudential regulation administered by the Federal Reserve (Fed) of banks and nonbanks. All large banks were automatically subject to more stringent standards, as were nonbanks designated by the Financial Stability Oversight Council (FSOC), popularly known as systemically important financial institutions (SIFIs). This can be classified as an institution-based approach to addressing risks to financial stability at the firm level. As discussed in this Insight, all four of the nonbanks that were designated by FSOC have since been de- designated, and the size threshold for enhanced regulation of banks was increased. In December 2019, FSOC finalized guidance to give precedence to an activities-based approach over an institution-based approach for nonbanks-regulating particular financial activities or practices to prevent them from causing financial instability. FSOC made future designations less likely by adding the following steps to the process: * pursue a SIFI designation only if a potential risk or threat cannot be addressed through an activities-based approach; * conduct a cost-benefit analysis of the designation, making a designation only if the expected benefits justify the expected costs that the [designation] would impose; * assess the likelihood that a firm would become distressed; and * create off-ramps before and after designation where SIFIs can address risks identified by FSOC to end designation. International insurance regulation has also moved away from a focus on institution-based regulation and toward activities-based regulation. The two approaches, however, need not be mutually exclusive. Congressional Research Service https://crsreports.congress.gov IN10997 CF'S NStGHT Prepai-ed for Mernbei-s and Committees 4 o. C- --q .. . . .. . . . . . .. . . . . .. . . . ..-----------------------------------------------------------------------------------------------------------------------------------------------------------