Following the recent crisis in the United States banking sector, the US Treasury and some prominent U.S. financial authorities have called for new rules to make it simpler for the Federal Reserve to identify nonbank institutions and supervise and control them.
In remarks at the Financial Stability Oversight Council (FSOC) Council Meeting on April 21, U.S. Treasury Secretary Janet Yellen expressed concern regarding “nonbank” financial institutions due to their current lack of supervision and the potential for financial contagion to spread when these firms experience periods of distress.
The umbrella term “nonbank” refers to any entity that does not possess a bank license but still offers specific financial services. Unlike conventional banks, these entities are not covered by the Federal Deposit Insurance Corporation (FDIC). Nonbanks consist of venture capital firms, cryptocurrency firms, and hedge funds.
“The existing guidance, issued in 2019, created unwarranted obstacles in the designation process,” Yellen stated.
Yellen stated that the new guidance measures eliminate these barriers to the designation of nonbank status for major financial firms. This procedure can take up to six years at present.
According to officials at the meeting, the new, streamlined supervision and designation process will still allow regulators and institutions ample time to communicate and discuss particulars.
In addition, the new guidance will replace the rules of the 2019 era with an analysis process in which the council determines whether “material financial distress at the company or the company’s activities could pose a threat to U.S. financial stability.”
In the aftermath of the collapses of crypto- and tech-friendly banks Silvergate Bank, Signature Bank, and Silicon Valley Bank last month in the worst banking crisis since 2008, Yellen reassured investors and ordinary citizens that the U.S. banking sector remains robust and secure.
She cautioned that the recent banking crisis is a detailed illustration of why FSOC and the Fed should be granted more excellent supervision and emergency provisions.
“Last month’s incidents demonstrate that we still have work to do. Critical is the authority for emergency interventions. Equally essential, however, is a supervisory and regulatory framework that can prevent financial disruptions from the beginning and spreading in the first place,” Yellen stated.
