Treasury tightens nonbank rules after banking crisis

U.S. Treasury and top U.S. financial regulators proposed new rules to make it easier for the Federal Reserve to designate nonbank institutions as systemically important so they can be supervised and regulated more easily.

The U.S. Treasury Secretary raised concerns about the lack of supervision currently applicable to "nonbank" financial institutions at the Financial Stability Oversight Council (FSOC) Council Meeting on April 21. As a result, Janet Yellen expressed concern over the potential for wider financial contagion to take hold when these firms experience distress periods. Any entity that does not hold a bank license but still provides specific financial services is considered a nonbank. Examples of nonbanks include venture capital firms, crypto companies, and hedge funds. Unlike traditional banking institutions, nonbanks do not receive protection from the Federal Deposit Insurance Corporation (FDIC).

The FSOC released proposals today to revise existing guidance on nonbank designations and to release a new framework to enhance financial stability.

Yellen said the new guidance measures remove these hurdles to major financial firms gaining nonbank status, a process that currently takes six years. According to meeting officials, the new, shorter oversight and designation process will still give regulators and institutions plenty of time to communicate and discuss details.

Additionally, the new guidance will replace the 2019-era rules with a process determining whether a company or its activities threaten U.S. financial stability. After last month's collapses of crypto- and tech-friendly banks Silvergate Bank, Signature Bank, and Silicon Valley Bank, Yellen assured investors and everyday citizens that the U.S. banking sector remains stable. Regarding the new guidance, she warned that the recent banking crisis is a clear example of why FSOC and the Fed need greater oversight and emergency provisions.