The U.S. Treasury and top financial regulators are proposing new rules to facilitate the Federal Reserve’s ability to designate nonbank institutions as systemically important, which would subject them to increased supervision and regulation.
Concerns have been raised by U.S. Treasury Secretary Janet Yellen over nonbank financial institutions during the Financial Stability Oversight Council (FSOC) Council Meeting on April 21, due to their current lack of supervision and the potential for widespread financial contagion during periods of distress.
Addressing nonbank financial intermediation in the U.S.
Nonbank financial institutions, including venture capital firms, crypto companies, and hedge funds, play a crucial role in providing capital to financial markets and funding to the U.S. economy.
However, the FSOC has identified vulnerabilities within these institutions. Market disruptions in March 2020 revealed that some nonbank financial institutions remain susceptible to stress, which may amplify or transmit stress throughout the financial system.
In 2021, the FSOC prioritized evaluating and addressing the risks to U.S. financial stability posed by hedge funds, open-end mutual funds, and money market funds.
Progress in this area includes re-establishing the Council’s Hedge Fund Working Group and Nonbank Mortgage Servicing Task Force and creating an Open-end Fund Working Group.
The Council identified climate change as an emerging threat to U.S. financial stability in its October 2021 Report on Climate-related Financial Risk.
The report provided recommendations for member agencies to assess climate-related financial stability risks better, enhance climate-related disclosures, improve access to climate-related financial data, and build capacity and expertise regarding climate-related financial risks.
Since the report’s publication, the Council has made significant progress in implementing the recommendations, including creating a staff-level Climate-related Financial Risk Committee and an external advisory committee, the Climate-related Financial Risk Advisory Committee.
Ensuring treasury market resilience
The resilience of the Treasury market is crucial for a strong U.S. economy and secure financial system. The Council’s work in this area includes supporting the Inter-Agency Working Group on Treasury Market Surveillance (IAWG), which has outlined steps to improve U.S.
Treasury market resilience, such as enhancing data quality and availability, bolstering market intermediation resilience, evaluating expanded central clearing, and enhancing trading venue transparency and oversight.
Crypto-asset activities have significantly expanded in recent years. In October 2022, the Council published its Report on Digital Asset Financial Stability Risks and Regulation, which reviews the financial stability risks and regulatory gaps posed by digital assets and provides recommendations to address these risks.
The report concludes that crypto-asset activities could pose risks to the stability of the U.S. financial system if their interconnections with the traditional financial system or their overall scale were to grow without adherence to or the development of appropriate regulation, including enforcement of the existing regulatory structure.