Top financial regulators on Friday moved to make it easier for regulators to say a nonbank institution poses a risk to the overall financial and must be subject to federal oversight as if it were a megabank, a reversal of procedures put in place in the Trump administration.
Treasury Secretary Janet Yellen brought forward the issue during a meeting of the Financial Stability Oversight Council, which comprises the top federal financial regulators, including Federal Reserve Chairman Jerome Powell. The group voted to adopt the new rules strengthening oversight.
The move has big implications for nonbanks. Nonbanks include firms such as hedge funds, private equity funds, investment banks, insurance companies, mortgage lenders, money market funds, and even cryptocurrency companies. These could all face increased scrutiny and oversight as part of the FSOC plan.
Basically, the new rules make it easier for the government to designate such entities as “systemically important,” which allows them to be placed under the supervision of the Fed.
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The proposal was first unveiled by Yellen during an April meeting of the FSOC, which began a public comment period. The previous guidance dates back to 2019 and was first adopted under former President Donald Trump’s administration.
Yellen has argued that the Trump-era guidance was predicated upon a “flawed” view of how financial crises start and their costs. She said that the previous guidance created “inappropriate hurdles” and caused the designation process for nonbanks to take up to six years.
“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,” Yellen told regulators when she unveiled the plan in April.
When the new rules were first proposed, there was much uncertainty with the stability of the U.S. financial system because Silicon Valley Bank had just imploded. The fallout from the failure sent shockwaves through the system and quickly raised fears of a contagion, and, while there wasn’t a massive wave of other closures, some banks did end up failing amid the uncertainty.
The FSOC, with its powers to declare institutions "systemically important," was created by the 2010 Dodd-Frank Act in the wake of the financial crisis as part of an effort to identify threats to the overall financial system.
Of note, the new FSOC rules garnered supported from the Bank Policy Institute, which represents the country’s largest banks — like JPMorgan Chase, Bank of America, and Goldman Sachs.
“We have continually made the point that activities with the same risk should have the same regulation, whether at a bank or nonbank,” said BPI President and CEO Greg Baer. “As regulatory pressures continue to push risk out of the banking system, that risk does not go away; rather, it accumulates in places where it is less understood and less regulated.”
Still, other groups have argued that it gives the government too much power over the finance industry and have expressed trepidation. The Investment Company Institute, an association of regulated funds, said in a public comment letter that it has “serious concerns” about FSOC’s new approach.
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“As compared with the Current Guidance, the Proposals take a step backward in terms of the rigor required of FSOC’s analyses of perceived risks to financial stability and appear to lower the bar for Council action in response to such risks,” the group said in a 56-page letter ahead of the Friday decision.