Yellen and regulators propose tighter oversight over nonbank financial firms
Zachary Halaschak
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Treasury Secretary Janet Yellen and other top regulators on Friday announced a proposal to strengthen federal oversight of nonbanks that pose systemic risk.
The proposal was unveiled during a meeting of the Financial Stability Oversight Council and would dial back guidance that was issued under the Trump administration that Yellen and others view as too lenient. The move would strengthen FSOC’s designation tool in order to make it more effective, Yellen said during the Friday meeting.
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“The existing guidance, issued in 2019, created inappropriate hurdles as part of the designation process. These additional steps are not legally required by the Dodd-Frank Act. Nor are they useful or feasible,” she said, in reference to the 2010 post-crisis financial reform law known as Dodd-Frank.
She added that some of the Trump-era guidance was predicated upon a “flawed” view of how financial crises start and their costs.
“It has been estimated that a designation process with these steps could take six years to complete,” Yellen continued. “That is an unrealistic timeline that could prevent the council from acting to address an emerging risk to financial stability before it’s too late.”
Nonbanks include firms such as hedge funds, private equity funds, investment banks, insurance companies, mortgage lenders, money market funds, and even cryptocurrency companies. Those could all face increased scrutiny and oversight as part of the FSOC plan.
During the Friday meeting, the council unanimously voted to begin a public comment period for the proposed guidance on FSOC’s procedures for designating nonbank firms and enhanced prudential standards.
The council also unanimously voted to issue for public comment a proposed analytic framework for financial stability risks. The framework looks to increase transparency to the public about how FSOC recognizes, assesses, and addresses possible risks to the economy’s financial stability, according to the Treasury Department.
“Today’s proposals are important to ensuring the council has a rigorous approach to identify, assess, and address risks to our financial system,” Yellen said. “The council remains committed to public transparency regarding its work, and today’s proposals would make us better equipped to handle risks to the financial system, whether they come from activities or firms.”
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The move comes just weeks after the issue of financial stability came roaring to the fore with the sudden collapse of Silicon Valley Bank and subsequent failure of Signature Bank. The fallout from the failures caused fears that the contagion could spread, and it did to some extent, even in Europe.
Switzerland-based megabank Credit Suisse began flailing amid the turbulence, and UBS then agreed to buy out its fellow Swiss competitor with support from Swiss authorities.