The Financial Stability Oversight Council voted to issue a proposal that would ease its ability to designate non-bank financial institutions as systemically important, placing them under Federal Reserve supervision.
The proposal would replace the FSOC's existing guidance, issued in 2019 during the Trump administration, which "created inappropriate hurdles" for using non-bank designation authority, Treasury Secretary Janet L. Yellen said during an FSOC meeting April 21.
"It has been estimated that a designation process with these steps could take six years to complete," Ms. Yellen added, which she said could prevent the council from addressing emerging risks to financial stability "before it's too late."
The new guidance would subject non-bank financial firms to "a preliminary analysis, based on quantitative and qualitative information," according to a Treasury Department fact sheet. Any firm identified for further review would receive notice, the fact sheet states, and the council would conduct a more in-depth evaluation using additional information from the firm.
"I applaud Secretary Yellen and the other FSOC members for proposing to rescind this harmful Trump-era guidance, which only served to hamstring our government's ability to promote financial stability," said Rep. Maxine Waters, D-Calif., who serves as ranking member of the House Financial Services Committee, in a statement April 21.
SEC Chairman Gary Gensler expressed his support for the updated guidance at the FSOC meeting April 21, stating, "Though we're never going to get rid of risk in the system, we must best identify, manage and guard against such risk to protect the American public."
The proposal comes after the collapses of Silicon Valley Bank and Signature Bank last month. On March 12, the Federal Deposit Insurance Corp., Fed and Treasury Department seized Signature Bank and announced they would protect all depositors at both banks, as the failures posed "systemic risk."
The Securities Industry and Financial Markets Association's asset management group said in a statement April 21 that it does not support designating asset managers as systemically important, because they are directed by investor clients and have small balance sheets.
"Upon initial review, the removal of language requiring consideration of an activities-based approach prior to a firm's designation, as well as the elimination of the cost-benefit analysis and an assessment of the likelihood of a firm's material distress is concerning," SIFMA's AMG said in its statement. "We look forward to commenting after further examining the proposal."
FSOC also issued a proposal April 21 to provide more transparency about how the council identifies and addresses financial stability risks. Both proposals will be available for public comment for a 60-day period following their publication in the Federal Register.
