New Rules to Ease Fed Oversight of Nonbank Institutions

Janet Yellen calls for increased regulation of nonbank financial

The U.S. Treasury Secretary, Janet Yellen, has called for increased regulation of nonbank financial institutions, warning of potential systemic risks to the U.S. financial stability. Nonbank entities are firms that provide financial services but do not hold a banking license and are not insured by the Federal Deposit Insurance Corporation (FDIC). Examples include hedge funds, venture capital firms, and crypto companies. 

Yellen criticized the existing 2019 guidelines for creating unnecessary obstacles in the designation process and called for the development of a new analysis process. This process will determine whether "material financial distress at the company or the company's activities could pose a threat to U.S. financial stability."

Officials from the Financial Stability Oversight Council (FSOC) have announced that new rules will make it easier for the Federal Reserve to supervise and regulate nonbank institutions.

FSOC announces new rules for easier oversight of nonbank financial institutions

This designation process currently takes up to six years, but the new, shorter oversight process will still allow enough time for regulators and institutions to communicate and discuss specifics. Yellen reassured investors and citizens that the U.S. banking sector remains robust and secure. 

However, she highlighted that recent banking crises, such as those that affected crypto and tech-friendly banks Silvergate Bank, Signature Bank, and Silicon Valley Bank, demonstrate why greater oversight and The FSOC and Fed should be provided with emergency provisions.

In summary, Yellen and the FSOC are calling for greater regulation of nonbank financial institutions to prevent wider financial contagion when these firms suffer through periods of distress. The new guidance measures will remove the obstacles in the designation process, replace the 2019-era rules with a new analysis process, and allow for greater oversight and emergency provisions to be granted to the FSOC and the Fed. 

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