Davis Polk partner David Portilla was quoted in American Banker discussing how the Financial Stability Oversight Council’s (FSOC) approach to systemic risk posed by nonbanks may change under the incoming administration. David thinks that the Trump administration will favor nonbanks when compared with prior administrations.

“Under the Trump administration, I think you’ll likely see less scrutiny of the nonbank sector,” he said. “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 article noted that FSOC has the power to designate nonbank financial institutions as “systemically important financial institutions” (SIFIs) if it determines that their failure could destabilize the U.S. economy. David pointed out 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,” David said. “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.”

He also noted that the first Trump administration saw FSOC as opaque and arbitrarily punitive toward nonbanks. David said, “I think the designation process has been criticized for lacking transparency and for creating competitive distortions on an uneven playing field. The Trump administration was responsive to those critiques and revised it for that reason.”

Discussing what to expect from FSOC over the next few years, David said, “FSOC is politically responsive, perhaps more so than some other financial regulators. 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.”

“There’s a high bar for designation under the current administration,” he continued. “And likely an even higher bar under a Republican administration, barring some crisis.”

“FSOC approach to nonbanks unlikely to change under Trump,” American Banker (November 14, 2024) (subscription required)

Copy link to share post