WASHINGTON, April 21 (Reuters) – Top US regulators on Friday proposed new rules to speed up the assessment of financial stability risks and make it easier to classify non-bank institutions as systemically important and subject them to Federal Reserve oversight.
Just over a month after two regional bank failures sparked the biggest contagion to the financial system since the 2008 financial crisis, the multi-regulator Financial Stability Oversight Council released the proposals for public comment.
US Treasury Secretary Janet Yellen has raised concerns about non-bank financial institutions, including hedge funds, over their lack of oversight and the possibility of systemic spillovers from distressed companies.
Revisions to guidance on classifying such companies as systemically important reverse some aspects of Trump-era changes in 2019 that made such classifications difficult.
Yellen said the new guidance removes some “unreasonable hurdles” in naming non-banks, causing the process to take up to six years.
“This is an unrealistic timeline that could prevent the Council from addressing an emerging risk to financial stability before it is too late,” she said in a remark ahead of the FSOC meeting she chaired on Friday.
The new policy drops the 2019 requirements that the FSOC assess a company’s likelihood of financial distress, use an “activity-based approach” and conduct a cost-benefit analysis before designation – which Todd, chairman of the National Credit Union Administration, said referred to as “Rube Goldberg”. like process.”
These are replaced by a quantitative and qualitative analysis process, during which the council determines whether “material financial difficulties of the company or the company’s activities could pose a threat to US financial stability,” a Treasury Department official told reporters, adding, that this is not the case full return to forecast for 2012.
The revised naming process also allows for full engagement between regulators and an entity under audit, officials said.
Federal Reserve Chair Jerome Powell told the meeting: “Overall, I believe the changes proposed by the Council will create a balanced approach to address potential risks to US financial stability and ensure that all are available to the FSOC standing instruments remain equal. “
NOT US
Hedge fund, mutual fund and wealth manager trading groups responded that regulators should look elsewhere for threats to financial stability.
“We know that naming a registered fund or fund manager would be the wrong answer,” Eric Pan, CEO of the Investment Company Institute, said in a statement.
“FSOC should avoid concluding that naming entities and using banking regulatory tools is the right way to fulfill its mission of mitigating wealth management risk.
The Securities Industry and Financial Markets Association’s Asset Management Group said asset managers should not be named because they are client-led and hold small balance sheets.
The group added that the reversal of Trump-era guidance is “worrying.”
RISKS, VULNERABILITIES
The new risk assessment framework proposed by FSOC aims to improve the council’s ability to address financial stability risks by reviewing a wide range of asset classes, institutions and activities, according to a Treasury Department fact sheet.
These include markets for debt, credit, short-term funds, stocks, digital assets, and derivatives; counterparties, payment and clearing systems; and financial companies, including banking institutions, brokers, wealth managers, investment firms, insurers, and mortgage lenders and services.
The new framework also identifies vulnerabilities that the FSOC and member regulators would consider when assessing potential stability risks. These include leverage, liquidity risk and maturity mismatches, market interconnectedness and concentration, operational risks and risk management activities.
Reporting by David Lawder; Edited by Paul Simao
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