(Bloomberg) -- The top US financial regulators proposed strengthening the tools used to scrutinize nonbank firms, including changes to Trump-era guidance that made it harder to tackle them.
US Treasury Secretary Janet Yellen on Friday announced a proposal by the Financial Stability Oversight Council that would revise the way nonbank firms are designated as systemically important institutions.
“The existing guidance — issued in 2019 — created inappropriate hurdles as part of the designation process,” Yellen said Friday. “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.”
She said such a designation process could take six years to complete — “an unrealistic timeline that could prevent the council from acting to address an emerging risk to financial stability before it’s too late.”
Yellen’s comments, delivered during an FSOC meeting, mark a long-anticipated shift under the Biden administration of how closely federal regulators scrutinize the biggest nonbank firms.
The proposed new guidance is likely to encourage those who worry that financial regulation had grown too lax under the Trump administration and instill fear across portions of Wall Street over the dreaded systemic-risk label, which brings tough oversight and steep compliance costs.
Areas that could attract scrutiny include insurers, private equity players, hedge fund and mutual fund firms, as well as newer industries such as crypto.
FSOC is also proposing a new framework for financial-stability risk identification, assessment, and response, Yellen said.
Yellen reiterated her message that the banking system remains sound, with strong capital and liquidity positions. She cautioned that the recent turmoil in the sector shows that the authority for emergency interventions is critical and made a nod to the new proposals.
“Equally as important is a supervisory and regulatory regime that can help prevent financial disruptions from starting and spreading in the first place,” she said.
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