Treasury proposes tighter oversight of nonbanks that pose systemic risk

Secretary of the Treasury Janet Yellen presented remarks at the start of the latest Financial Stability Oversight Council Meeting, stating in part: "Our first agenda item is a discussion and votes on two proposals. The first is the Council’s proposed framework for financial stability risk identification, assessment, and response. The second is the proposed interpretive guidance on nonbank financial company designations… We are proposing revisions to certain elements of the Council’s existing guidance that have made it difficult to use its nonbank designation authority. The existing guidance – issued in 2019 – created inappropriate hurdles as part of the designation process. These additional steps are not legally required by the Dodd-Frank Act. Nor are they useful or feasible. Some are based on a flawed view of how financial crises begin and the costs that they impose. It has been estimated that a designation process with these steps could take six years to complete. That is an unrealistic timeline that could prevent the Council from acting to address an emerging risk to financial stability before it’s too late. The designation tool serves as an important part of our post-Global Financial Crisis defense. It is an important preventative tool to address systemic risks that may arise from a nonbank financial firm whose activities or distress could threaten the financial system. We are acting today to restore the effectiveness of this authority. As we do, we are also taking significant steps to ensure that the Council’s nonbank designation process is rigorous and transparent. The proposed guidance provides for strong procedural protections. This includes significant engagement and communication with companies under review – minimizing administrative burdens on these companies while providing ample opportunities to be heard. The Council will also engage with the company’s primary regulator during any designation review. And through the separate proposed analytic framework, we are providing the public with more information about how nonbank designation fits into the Council’s broader approach to financial stability risk monitoring and mitigation. In all, I believe that our votes today are a major step toward strengthening our safeguards for the U.S. financial system. We look forward to public comments on these proposals." Some non-bank financial companies that may see their shares react to the proposals include BlackRock (BLK), MetLife (MET), Prudential (PRU), AIG (AIG) and Rocket Companies (RKT). Reference Link