Banking and Finance Law Daily Wrap Up, FINANCIAL STABILITY—FSOC nonbank designation proposal draws support from trade groups, opposition from Better Markets, (May 19, 2026)

By Shashi Kant, BALLB, LLM

A joint industry letter backs return to 2019-style features, while Better Markets says proposal would make nonbank SIFI designations too difficult to use.

Comments on the Financial Stability Oversight Council’s proposed interpretive guidance for nonbank financial company designations reflected a familiar divide over how aggressively the Council should use its authority to subject nonbank firms to Federal Reserve supervision and enhanced prudential standards. A coalition of financial trade associations, in a letter publicized by the Financial Technology Association, supported the proposal as a return to a more transparent and analytically rigorous process. Better Markets, by contrast, urged FSOC to withdraw the proposal, arguing that it would effectively sideline one of Dodd-Frank’s central post-crisis safeguards.

As previously reported, FSOC’s March proposal would replace the 2023 interpretive guidance on nonbank designations. The proposed guidance would again prioritize an activities-based approach to financial stability risks and would make company-specific designation a tool used only if risks cannot be addressed through other regulatory channels. It would also restore several features associated with the 2019 guidance, including an explicit cost-benefit analysis and an assessment of the likelihood of material financial distress before designation (see Banking and Finance Law Daily, Mar. 26, 2026).

Trade groups support restored 2019 features. In a press release announcing a joint trades letter, the Financial Technology Association said the coalition supported the proposal because it would restore key elements of the 2019 interpretive guidance that were removed in 2023. According to FTA, those features include requiring a cost-benefit analysis, prioritizing an activities-based approach to systemic risk, and evaluating the likelihood of material financial distress before any designation decision. The coalition said nonbank SIFI designation should be a tool of last resort. In its view, placing nonbank firms under Federal Reserve supervision without a clear systemic-risk justification can distort competition, stifle innovation, and increase costs while reducing consumer choice. FTA said the proposed guidance would return FSOC to what it described as a transparent, analytically rigorous designation framework.

Better Markets says the proposal would weaken nonbank oversight. Better Markets took the opposite view in both a press release and comment letter. The group said the proposal would “effectively remove” FSOC’s ability to designate and regulate a nonbank financial company that poses a systemic risk and would instead favor a deregulatory agenda that increases the likelihood of financial instability.

In the comment letter, Better Markets said the proposal would almost entirely replicate what it called the “reckless” 2019 guidance by effectively abandoning entity-based designation in favor of a nonbinding activities-based approach. The group argued that the proposal would place so many hurdles in front of company-specific designation that FSOC would rarely, if ever, use its section 113 authority against a large nonbank firm, regardless of the risks posed. Better Markets identified four aspects of the proposal that it said would make designation too difficult to use: its explicit prioritization of an activities-based approach; its statement that company-specific designation would be pursued only if risks cannot be addressed through activities-based measures; its requirement for a cost-benefit analysis before designation; and its narrower interpretation of what constitutes a threat to U.S. financial stability.

The comment letter also attacks cost-benefit and economic-growth elements. Better Markets objected to the proposal’s requirement that FSOC weigh expected benefits against expected costs before making a designation. The group argued that Congress did not include cost-benefit analysis among the statutory factors for section 113 designations and that requiring it would add an extra hurdle not found in the Dodd-Frank Act. The comment letter separately criticized the proposal’s addition of “impediments to economic growth” as a consideration in FSOC’s analytic framework. Better Markets argued that the Council was using economic growth as a pretext for broad deregulation, contending that financial stability is the foundation of sustainable growth rather than a byproduct of looser regulation.

Better Markets points to current market risks. In pressing for withdrawal of the proposal, Better Markets said an activities-based approach would be too slow and too discretionary to address real-world risks in a timely manner. The letter pointed to the hedge fund Treasury basis trade, private credit turmoil, and stablecoin-related risks as examples of areas where FSOC should be prepared to use firm-specific tools rather than rely on informal coordination or nonbinding recommendations to primary regulators. The group said the proposal would leave major risks in the shadow banking system “unmonitored and unaccountable” and warned that fragmented action by multiple regulators could recreate some of the blind spots that contributed to the 2008 financial crisis.

Companies: Better Markets; Financial Technology Association

RegulatoryActivity: BankHolding BankingOperations DoddFrankAct FederalReserveSystem FinancialIntermediaries FinancialStability GCNNews PrudentialRegulation