In response to last month’s turbulence in the banking industry, financial regulators on Friday proposed a more comprehensive approach in identifying and addressing threats to financial stability, including closer scrutiny of nonbank financial companies.
US Treasury Secretary Janet Yellen announced a new framework proposed by the Financial Stability Oversight Council that outlines the vulnerabilities in the financial system and the tools regulators can use to address those risks.
“The authority for emergency interventions is critical. But equally important is a supervisory and regulatory regime that can help prevent financial disruptions from starting and spreading in the first place,” Yellen said at the FSOC meeting.
The proposal also reverses guidance issued in 2019 that made it more difficult for nonbank financial companies, such as hedge funds and insurers, to be designated as systemically important institutions.
“The designation tool serves as an important part of our post-Global Financial Crisis defense,” Yellen said. “It is an important preventative tool to address systemic risks that may arise from a nonbank financial firm whose activities or distress could threaten the financial system.”
FSOC has the power to designate nonbank financial firms as systemically important institutions if their failures pose a threat to financial stability, which would place those firms under the supervision of the Federal Reserve.
Financial companies identified for the designation will go through a two-stage evaluation process in which FSOC will collect information from regulators and the company itself before voting on a decision. Firms would be able to request a hearing if FSOC makes a proposed designation.
Yellen said the previous guidance, which made designation harder, could take six years to complete, which she said was “an unrealistic timeline that could prevent the Council from acting to address an emerging risk to financial stability before it’s too late.”
