In recent remarks, Acting Comptroller of the Currency Michael Hsu proposed a “trip wire approach” to the identification of potential financial stability risks under the aegis of the Financial Stability Oversight Council (FSOC).
Under this approach, FSOC would establish a set of metrics and thresholds, which if exceeded would trigger the assessment of systemic risk. The trip wires could complement other modes of analysis and would not have to be the exclusive means of prompting an assessment. The FSOC would publish the trip wires and seek public comment on their appropriateness and calibration before finalizing them. The proposal and finalization would be transparent to the public.
Notably, the only consequence of crossing a trip wire would be to move from the identification phase to the assessment phase of the analytic framework. Each assessment would then be conducted on its own merits, irrespective of the trip wire, which would inform the need for an FSOC response (if any), ranging from interagency coordination and information-sharing to initiating the process to consider a designation. By design, the trip wires would be several steps removed from any formal action by the FSOC. The sole purpose and consequence of the trip wires would be to prompt an assessment.
For example, cash managed by nonbanks on behalf of customers is rising. That metric—cash managed by a nonbank on behalf of its customers—could serve as a trip wire for payments-focused fintechs and other nonbank companies. The FSOC could work to standardize how this metric would be measured and could apply a scalar based on how a company manages its customers’ cash.
For instance, a simple pass-through arrangement of customers’ cash to a bank where all funds are segregated would have a much lower scalar than an arrangement where the company commingled those funds with its own and could use it for whatever purpose it chose.