US Treasury Seeks to Tighten Nonbank Rules Following Banking Crisis

The US Treasury and a number of senior US financial regulators proposed new rules to make it easier for the Federal Reserve to classify nonbank institutions as systemically significant, making supervision and regulation easier.

In remarks delivered at the Financial Stability Oversight Council (FSOC) Council Meeting on April 21, U.S. Treasury Secretary Janet Yellen expressed concern about “nonbank” financial institutions due to their current lack of supervision and the potential for wider financial contagion to take hold when these firms are in distress.

The word “nonbank” refers to any entity that does not hold a bank license but performs particular financial services. Unlike regular banking institutions, these businesses are not insured by the Federal Deposit Insurance Corporation (FDIC). Examples of nonbanks include venture capital firms, cryptocurrency companies, and hedge funds.

“The existing guidance — issued in 2019 — created inappropriate hurdles as part of the designation process,” Yellen explained.

Yellen stated that the new guidance measures remove numerous “inappropriate hurdles” when it comes to certifying significant financial businesses as nonbanks, a process that now takes up to six years.

According to meeting officials, the new, faster monitoring and designation process will still offer regulators and institutions plenty of time to communicate and debate specifics.

The new guidance will also replace the 2019-era standards with an analytical process in which the council assesses if “material financial distress at the company or the company’s activities could pose a threat to U.S. financial stability.”

Following 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 common consumers that the banking industry in the United States remains resilient and secure.

She warned, nodding directly to the new guidance, that the recent banking crisis is a clear example of why FSOC and the Fed should be given broader control and emergency provisions. “The events of last month demonstrate that our work is not yet complete.” The authority to intervene in an emergency is crucial. “However, a supervisory and regulatory regime that can help prevent financial disruptions from starting and spreading in the first place is equally important,” Yellen added.