FameEX Hot Topics | US Treasury Proposes Stricter Regulations for Nonbank Institutions in Response to Banking Crisis
The United States Treasury has proposed new regulations to tighten oversight and supervision of nonbank financial institutions following concerns that they pose a systemic risk to the country's financial stability. In a recent Financial Stability Oversight Council (FSOC) Council Meeting, U.S. Treasury Secretary Janet Yellen highlighted the lack of supervision of nonbank entities and their potential to cause wider financial contagion during periods of distress. "Nonbank" refers to any financial entity that does not hold a bank license but provides specific financial services. Unlike traditional banking institutions, these entities are not insured by the Federal Deposit Insurance Corporation (FDIC) and include venture capital firms, crypto companies, and hedge funds.
The new guidance proposed by the Treasury seeks to make it easier for the Federal Reserve to designate nonbank institutions as systemically important, making it easier to supervise and regulate them. The existing guidance, issued in 2019, created inappropriate hurdles during the designation process, according to Yellen. The new guidance will replace the 2019-era rules with 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." Yellen stated that the new guidance would remove these hurdles, enabling a shorter oversight and designation process that will still allow regulators and institutions enough time to communicate and discuss specifics. The current process takes up to six years to designate a nonbank institution as systemically important.
The move comes in the wake of the collapse of several crypto- and tech-friendly banks, including Silvergate Bank, Signature Bank, and Silicon Valley Bank, during last month's worst banking crisis since 2008. Yellen reassured investors and everyday citizens that the U.S. banking sector remains robust and secure, but emphasized the need for greater oversight and emergency provisions to be granted to FSOC and the Fed.
Yellen added that the recent banking crisis serves as a reminder that the authority for emergency interventions is critical. Still, equally important is a supervisory and regulatory regime that can prevent financial disruptions from starting and spreading in the first place. The proposed rules will make it easier for regulators to identify nonbank institutions posing a threat to the financial system and take appropriate actions to prevent financial instability.
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