US Treasury Outlines Stricter Rules To Address Nonbank Risk

November 9, 2023
The US Treasury has finalised guidance that makes it easier for financial regulators to impose higher prudential standards on nonbank financial institutions — a move labelled as “disappointing” by one market player.

The US Treasury has finalised guidance that makes it easier for financial regulators to impose higher prudential standards on nonbank financial institutions — a move labelled as “disappointing” by one market player.

On November 3, the Financial Stability Oversight Council (FSOC), chaired by secretary of the treasury Janet Yellen, issued updated guidance on how the council plans to designate nonbank financial firms for more stringent oversight.

The new rules reverse previous guidance, issued in 2019, which made it harder for the FSOC to designate nonbank financial companies for Federal Reserve supervision and higher prudential standards, such as capital requirements.

According to Reuters, the Treasury would likely use the new authority to supervise asset managers and hedge fund giants, such as BlackRock and Bridgewater.

However, the Treasury announcement also pointed out that the post-financial crisis Dodd-Frank Act gives the council authority to designate “payment, clearing and settlement activities that are, or are likely to become, systemically important”. 

In an accompanying statement, Yellen said this authority is important to “identify and respond to risks to financial stability” in the wake of the global financial crisis.

“To maintain the strength of the financial sector, we need a nimble but robust structure to monitor and address the build-up of risks that could threaten the system.”

She emphasised that recent stresses in some financial sectors “arising from the onset of the pandemic” and the sudden failures of some regional banks “underscore the continuing need to remain vigilant to threats to ensure the resilience of the financial system and our economic strength”. 

The guidance was issued together with a so-called “analytic framework for financial stability risks”, which lays out the FSOC’s process for identifying and addressing risks to financial stability.

SIFMA feels the changes are unnecessary

SIFMA, the association for the US securities industry, called the documents “disappointing”.

“The changes proposed are entirely unnecessary for many nonbank financial companies, like asset managers, which are already subject to stringent federal oversight by the SEC (US Securities and Exchange Commission) and have shown consistent resilience in times of economic stress,” the trade body wrote.

SIFMA added that it believes an activities-based approach could better “address the sources of risk” to financial stability on a system-wide basis, instead of addressing risks “only at a particular nonbank financial company” that may be designated.

Previously, in 2013, the Treasury designated MetLife as a systemically important nonbank financial institution.

That decision was later overturned in court after judges ruled that the designation process was “fatally flawed”, since it failed to assess MetLife’s likelihood of failure.

FSOC also designated three other nonbanks in 2014, namely American International Group, General Electric Capital Corporation and Prudential Financial, but rescinded each of these designations between 2016 and 2018 after finding that they no longer meet the criteria for designation.

The updated guidance now establishes a two-phase process for the evaluation of a designation of a nonbank firm. In the first stage, FSOC will undertake a preliminary analysis, where the company is given 60 days to engage with and inform regulators, before they vote on whether to move the case to a second stage. 

The second stage involves an in-depth evaluation including “significant engagement with the company under review and its primary financial regulator”.



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