The US Treasury and a number of high-level US financial regulators proposed new rules to make it easier for the Federal Reserve to classify non-bank institutions as systemically important in order to better supervise and regulate them.
In her remarks at the Financial Stability Oversight Council (FSOC) meeting on 21 April, US Treasury Secretary Janet Yellen expressed concern about “nonbank” financial institutions because they are currently not supervised and there is a risk of contagion effects if these entities get into a crisis.
Nonbank” is an umbrella term for all companies that do not have a banking licence but still offer certain financial services. Unlike traditional banking institutions, these companies are not insured by the Federal Deposit Insurance Corporation (FDIC). Non-banks include venture capital firms, crypto companies and hedge funds.
Today, the FSOC took action and released proposals to revise the existing non-bank classification guidance and publish a new financial stability framework. These measures will strengthen US financial stability and increase the transparency of the Council’s important work.
— Treasury Department (@USTreasury) April 21, 2023
“The existing guidance – issued in 2019 – created unreasonable hurdles in the designation process,” Yellen said.
Yellen said the new guidance removes many “unreasonable hurdles” when it comes to granting non-bank status to large financial firms, a process that currently takes up to six years.
According to participants at the meeting, the new, shorter supervision and designation process will still give supervisors and institutions enough time to communicate with each other and discuss details.
In addition, the new guidelines will replace the 2019 rules with an analysis process in which the council determines whether “material financial distress of the firm or the firm’s activities could pose a threat to financial stability in the United States.”
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In the wake of the worst banking crisis since 2008, which also victimised crypto and tech-friendly banks Silvergate Bank, Signature Bank and Silicon Valley Bank, Yellen reassured investors and ordinary citizens alike that the US banking sector remains robust and safe.
Alluding directly to the new guidance, she warned that the recent banking crisis was a clear example of why FSOC and the Fed should be granted stronger oversight and emergency provisions.
“The events of the last month show us that our work is not done. Emergency intervention powers are crucial. But just as important is a supervisory and regulatory system that can help prevent financial crises from developing and spreading in the first place,” Yellen said.