US Treasury seeks to tighten nonbank rules following banking crisis

Regulation

The United States Treasury and a number of top U.S. financial regulators suggested new rules to make it easier for the Federal Reserve to designate nonbank institutions as systemically important, making it easier to supervise and regulate them.

In remarks from the Financial Stability Oversight Council (FSOC) Council Meeting on April 21, U.S. Treasury Secretary Janet Yellen raised concerns over “nonbank” financial institutions due to their current lack of supervision and the potential for wider financial contagion to take hold when these firms suffer through periods of distress.

‘Nonbank’ is an umbrella term for any entity that does not hold a bank license but still provides specific financial services. Unlike traditional banking institutions, these entities are not insured by the Federal Deposit Insurance Corporation (FDIC). Nonbanks 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.

Yellen said the new guidance measures remove many “inappropriate hurdles” when it comes to designating nonbank status to major financial firms, a process which currently takes up to six years.

According to officials at the meeting, the new, shorter oversight and designation process will still allow for plenty of time for regulators and institutions to communicate and discuss specifics.

Additionally, 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.”

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In the wake of the worst banking crisis since 2008, which claimed crypto and tech-friendly banks Silvergate Bank, Signature Bank and Silicon Valley Bank, Yellen reassured both investors and everyday citizens that the U.S. banking sector remains robust and secure.

Nodding directly to the new guidance, she warned the recent banking crisis is a cut-and-dry example of why greater oversight and emergency provisions should be granted to FSOC and the Fed.

“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.

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