Financial regulators continue to focus their attention on financial stability risks, particularly in the non-bank sector, suggesting Financial Stability Oversight Council (“FSOC”) powers could be deployed to address these risks.  Nonbank financial institutions (“NBFI”) and technology-related risks, particularly those related to artificial intelligence (“AI”), were key areas of focus in this month’s Congressional hearings with FSOC’s chair, Treasury Secretary Janet Yellen, about the FSOC 2023 Annual Report (for more detail about the report, see our client update, available here).  NBFI risks also continue to be a focus of regulatory concern more broadly, as financial regulators emphasize the need for appropriate review of NBFI activities.  For instance, Acting Comptroller of the Currency Michael Hsu focused on the financial stability risks of certain forms of NBFI, particularly payments and private equity/private credit, in his speech yesterday at Vanderbilt University.

The Congressional hearings drew renewed attention to the powers of FSOC, with lawmakers on both sides of the aisle highlighting the potential for FSOC designations and other FSOC actions.  In her statements in both hearings, Secretary Yellen particularly highlighted five areas of ongoing work from the Annual Report: (1) risks from the banking sector and from NBFI; (2) climate-related financial stability risks; (3) cybersecurity risks; (4) AI in financial services and (5) digital assets and related risks.[1]  Questions from lawmakers during the hearings particularly centered on NBFI and the technology-related risks posed by cybersecurity concerns, AI and digital assets.

Recent NBFI Regulatory Developments

Financial regulators remain focused on NBFI risks broadly, particularly in light of fast-growing bank lending to NBFI.  Specifically, regulators, including FRB Governor Michelle Bowman in a speech earlier this month, continue to raise concerns about the migration of bank activities to the nonbank sector.  Similarly, Acting Comptroller Hsu told the Financial Times that NFBIs should receive “due attention.”  He also noted that NBFI lending poses risks because it pushes banks into lower-quality, higher-risk lending, which he called a “race to the bottom.”

Acting Comptroller Hsu also discussed NBFI risks in a speech at Vanderbilt University on February 21, 2024 regarding the blurring of the line between banking and commerce, including nonbank finance.  He particularly focused on the financial stability risks associated with (1) payments, particularly in the context of “banking being rebundled” by NBFI (i.e., combined with lending and deposit-taking) and associated regulatory gaps (including the lack of a comprehensive federal money transmitter regime), and (2) private equity/private credit (specifically the financial stability risks he said were associated with the growth of private credit, expansion into affiliated insurance activities and increasing use of non-closed-end fund structures).  In both these areas, he highlighted several characteristics, such as the size of the industries, their interconnectedness, their role as a source of credit and regulatory gaps, all of which we note are also among the statutory factors required for consideration in making designations under the Dodd-Frank Act.  He further noted that risks presented by mortgage servicing and hedge funds “may warrant similar, or even more urgent, attention.”

In his speech, he also proposed a “trip wire approach” that would complement the recently-finalized FSOC analytic framework (discussed in our recent client update, available here).  That framework has three phases to addressing potential and emerging financial stability risks: (1) identification; (2) assessment; and (3) response.  Acting Comptroller Hsu’s suggested “trip wire approach” would apply to the identification stage of FSOC’s framework, under which FSOC would establish a set of metrics and thresholds which, if exceeded, would trigger the assessment phase.  He proposed that such “trip wires” be published by FSOC for public comment on their appropriateness and calibration before FSOC finalizes them.

In addition, the SEC voted on February 8, 2024 to formally adopt amendments to Form PF, a reporting tool used by FSOC and the SEC to assess systemic risk.[2]  This is the third revision to Form PF in the last year, each designed to provide additional insight to financial regulators regarding private fund risks.  In his statement on these final amendments, SEC Chair Gary Gensler explained that the SEC designed the amendments to enhance regulatory “understanding of the private fund industry as well the potential systemic risk posed by the industry and its individual participants.”  He also emphasized the size, scale and interconnectedness of private funds (relatedly, each of these themes are among the statutory factors for both NBFI and activities-based FSOC designation under Sections 113 and 120 of the Dodd-Frank Act).

Secretary Yellen’s Congressional Testimony – Use of FSOC Powers

In the Congressional hearings earlier this month, Secretary Yellen discussed a range of financial stability risks, including those posed by NBFI, and discussed how FSOC powers could be deployed to address these risks.  She emphasized, as she has before, that it is important that the “entire tool kit that Congress gave to FSOC is usable” and that designation is not “the preferred tool,” rather, the tool FSOC would use “depends on the specifics of the financial stability risk.”[3]  In her comments, Secretary Yellen discussed FSOC’s recently finalized analytic framework for financial stability risks and updated guidance on FSOC’s nonbank financial company determinations process. She also did not rule out the use of FSOC’s designation authority.  When Rep. McHenry asked if there are “firms that FSOC has identified that are being analyzed right now for designation,” Secretary Yellen simply responded that it was not appropriate to talk about individual firms, noting that FSOC has “certainly not reached a stage at which [FSOC] has taken any action or received recommendations with respect to designation.”

Secretary Yellen also particularly highlighted the value of the activities-based approach where “financial stability risks are not created by an institution, but rather by market practices” specifically pointing, for example, to money market funds and open-end bond funds, discussed below.[4]

Key Areas of Focus

Below, we discuss a few noteworthy areas of concern highlighted in Secretary Yellen’s testimony and answers to lawmaker questions.

NBFIsSecretary Yellen explained that “the shadow banking sector is very large, and we are very focused on potential risks,” and emphasized that NBFI risk is “very high on our agenda.”  She also noted the migration of financial activities to the nonbank sector, and specifically said, in response to a question, that private credit could be an example of that migration.

Money market funds and open-end bond funds. Secretary Yellen also suggested that the activities-based designation, not company designation, approach would be appropriate for activities of money market mutual funds and open-ended bond funds that present an “industry-wide practice of concern.”  In response to a question from Representative Wagner (R-MO), she specifically expressed concern about “pressures on open end bond funds that can be forced to sell less liquid assets,” explaining that industry-wide practices “are probably best addressed” with an activities-based approach.  She also noted that the Securities and Exchange Commission (the “SEC”) has pursued activity-based regulation already with regard to money market funds.[5]  These remarks are consistent with Secretary Yellen’s past comments, where she has consistently emphasized the systemic risks presented by these funds.[6]

Nonbank mortgage companies. Secretary Yellen also noted FSOC’s focus on the financial stability risks of nonbank mortgage companies, particularly given their significant presence in the market for mortgage origination and their lack of access to deposits and other liquidity backstops for short-term financing in the way that banks have.  A report from FSOC’s nonbank mortgage servicing task force, which will precede further FSOC action, is expected as soon as March.

Commercial real estate (“CRE”) and the banking sector.  Risks presented by stress in the CRE market were the first vulnerability highlighted in the 2023 FSOC Annual Report, and these risks were a significant focus in the Congressional hearings, with some lawmakers specifically citing the recent stress at New York Community Bancorp.  In response to a question, Secretary Yellen emphasized that FSOC is “looking at [CRE] in a comprehensive way” and that it is “working with the bank supervisors to understand exposures,” noting that it “requires careful supervisory attention.”  Secretary Yellen cited the potential impact on regional banks and smaller banks, saying she believed CRE risks were “manageable” but that some institutions may be “quite stressed” by the CRE market.

Climate and racial disparities.  Secretary Yellen also highlighted certain aspects of climate-related financial risks, including rising insurance costs, noting that many of these changes disproportionally affect low-income communities, and alluded to the Dodd-Frank Act requirement that requires FSOC to consider low-income, minority or underserved communities in making designations.[7]

Cyber.  Secretary Yellen said that bolstering protections against cybersecurity risks is a key area of focus for FSOC.  In particular, she said it was “critical” to oversee third-party service providers in the context of risks posed by the threat of cybersecurity breaches in discussion with Representative Foster (D-IL), who recently introduced the Strengthen Cybersecurity for the Financial Sector Act, which would grant the National Credit Union Administration and the Federal Housing Finance Authority the authority to oversee third-party vendors.  Secretary Yellen noted that FSOC staff are planning to issue a report on AI-specific cybersecurity and fraud risks by the end of March.

AI.  Secretary Yellen and several lawmakers focused on numerous types of risks posed by AI (including risks to consumers and cyber risk), which was included as an area of financial stability risk in the FSOC 2023 Annual Report for the first time.  Secretary Yellen expressed her concern about AI risks and explained that FSOC is seeking to deepen its understanding of the ways in which AI could create systemic financial risk so that it may “define best practices for financial institutions,” and that it continues to monitor the rapidly-changing developments in the space.

Discussing the implications of AI with Senator Warner (D-VA)—who recently introduced bipartisan legislation along with Senator Kennedy (R-LA) that would task FSOC with coordinating AI evaluations across the financial sector—Secretary Yellen noted that the administration would welcome congressional initiative in the AI space.

Digital assets.  Secretary Yellen reiterated, as she has before, that the digital asset market, while relatively small, nevertheless could present financial stability risk, referencing FSOC’s prior recommendations that Congress provide certain new authorities for the effective regulation of digital assets.  She explained that the digital asset sector “should be regulated because it inherently has run risk, very similar to banking organizations,” while acknowledging that that regulation may look different than bank regulation, such as with regard to capital standards.


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[1]        See Statement, Janet L. Yellen, Sec’y Treasury, Testimony of Secretary of the Treasury Janet L. Yellen Before the Committee on Financial Services, U.S. House of Representatives (Feb. 6, 2024), available here; Statement, Janet L. Yellen, Sec’y Treasury, Testimony of Secretary of the Treasury Janet L. Yellen Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate (Feb. 8, 2024), available here.

[2]        See Statement, Gary Gensler, Chair, Sec. Exch. Comm’n, Statement on Final Joint Amendments to Form PF (Feb. 8, 2024), available here.

[3]        See, e.g., Press Release, Janet L. Yellen, Sec’y Treasury, Remarks by Secretary of the Treasury Janet L. Yellen at the Open Session of the meeting of the Financial Stability Oversight Council (Nov. 3, 2023), available here (“designation is only one of the Council’s tools and is not being prioritized over other approaches to addressing financial stability risks.”).

[4]        While Secretary Yellen discussed the authorities available to FSOC through the Dodd-Frank Act, several lawmakers noted in the hearings the delay in producing the Dodd-Frank Act-mandated report by FSOC on the economic impact of financial services regulatory changes.  See Letter from Sen. Cynthia Lummis et. al., to the Hon. Janet Yellen, Sec’y Treasury (Feb. 5, 2024), available here.

[5]        See Press Release, U.S. Securities and Exchange Commission, SEC Adopts Money Market Fund Reforms and Amendments to Form PF Reporting Requirements for Large Liquidity Fund Advisers (Jul. 12, 2023), available here.

[6]        See Press Release, Janet L. Yellen, Sec’y Treasury, Remarks by Secretary of the Treasury Janet L. Yellen at the National Association for Business Economics 39th Annual Economic Policy Conference (Mar. 30, 2023), available hereSee also Remarks By Under Secretary for Domestic Finance Nellie Liang at the Fifth European Central Bank Macroprudential Policy and Research Conference (Oct. 17, 2023), available here.

[7]        Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 929-Z, 124 Stat. 1376, 1398–99, 1408–09 (2010) (codified at 12 U.S.C. § 5323(a)(2)(E), (b)(2)(E) and 12 U.S.C. § 5330(a)).


Gregory Lyons is a corporate partner and Co-Chair of Debevoise’s Financial Institutions Group. Mr. Lyons is also Chair of the New York City Bar Association Committee on Banking Law. He can be reached at


Avi Gesser is Co-Chair of the firm’s Data Strategy & Security Group. He can be reached at


Taylor Richards is a corporate associate and a member of Debevoise's Banking Group. She can be reached at


Tzerina Dizon is a corporate associate and a member of the Financial Institutions Group. She can be reached at


Tara R. Holzer is a corporate law clerk and a member of the Financial Institutions Group and Banking Group. She can be reached at