The Financial Stability Oversight Council (FSOC) Meeting held on April 21 saw the United States Treasury and several top financial regulators suggest new rules aimed at simplifying the Federal Reserve’s process of designating nonbank institutions as systemically important. This move is expected to make it easier to monitor and regulate such institutions.
U.S. Treasury Secretary Janet Yellen expressed her concerns over the lack of supervision of nonbank financial entities during the meeting, highlighting the potential for wider financial contagion when these firms experience periods of distress. Nonbank financial entities, which provide specific financial services but do not possess a bank license and are not insured by the Federal Deposit Insurance Corporation (FDIC), include venture capital firms, crypto companies, and hedge funds.
“The existing guidance — issued in 2019 — created inappropriate hurdles as part of the designation process,” Yellen said.
During the meeting, Yellen stated that the new guidance measures eliminate many “inappropriate hurdles” in the process of designating nonbank status to major financial firms, which currently takes up to six years. Officials confirmed that the new, shorter oversight and designation process still allows ample time for regulators and institutions to communicate and discuss specifics. The 2019-era rules will be replaced by an analysis process where the council determines if “material financial distress at the company or the company’s activities could pose a threat to U.S. financial stability.”
Despite the worst banking crisis since 2008, which affected crypto and tech-friendly banks like Silvergate Bank, Signature Bank, and Silicon Valley Bank, Yellen reassured investors and the public that the U.S. banking sector remains strong and secure. She emphasized the need for greater oversight and emergency provisions to be granted to FSOC and the Fed, citing the recent banking crisis as a clear example of the importance of a supervisory and regulatory regime that can help prevent financial disruptions from starting and spreading.
“Last month’s events show us that our work is not yet done. The authority for emergency interventions is critical. But equally as important is a supervisory and regulatory regime that can help prevent financial disruptions from starting and spreading in the first place,” Yellen said.