Recently, the United States Treasury along with a number of top financial regulators in the country suggested new rules which also involve the crypto sector. Sources suggest that these rules will make it easier for the Federal Reserve to supervise the financial sector.
Speaking at the recent Financial Stability Oversight Council (FSOC) Council Meeting, U.S. Treasury Secretary Janet Yellen raised concerns over “nonbank” financial institutions. She said that due to the current lack of supervision and the potential for wider financial contagion to take hold when these firms suffer through periods of distress.
A nonbank financial institution (NBFI) is a type of firm that does not own a full banking license and cannot accept deposits from the masses but still provides specific financial services. Unlike traditional banking institutions, these firms are not insured by the Federal Deposit Insurance Corporation (FDIC). Nonbanks include venture capital firms, crypto companies, and hedge funds.
Calling for new regulation, Yellen said that the current rules create obstacles as part of the designation process and must be replaced with a better alternative. Quoting her:
The existing guidance issued in 2019 created inappropriate hurdles as part of the designation process.
The Treasury Secretary said the new regulatory measures remove these hurdles to designating “nonbank” status to major financial firms, a process that currently takes up to six years. The rules will designate nonbank institutions as systemically important, making it easier to supervise and regulate them.
As per the officials who were present at the meeting, the new, shorter oversight and designation process will still have ample time for regulators and institutions to communicate and discuss specifics.
Additionally, the new regulation will replace the 2019 era rules with a more comprehensive and analytical process. The new process will allow the council to determine if “material financial distress at the company or the company’s activities could pose a threat to U.S. financial stability.”
Notably, the recent move hails from the concerns that erupted following the collapse of big banks in the US which has been known as the worst banking crisis since 2008. After the collapses of crypto- and tech-friendly banks Silvergate Bank, Signature Bank, and Silicon Valley Bank (SVB) that took place last month, Yellen reassured both investors and everyday citizens that the U.S. banking sector remains robust and secure.
Pointing towards the new regulation, she warned the recent banking crisis provides clear examples of why greater oversight and emergency provisions should be granted to FSOC and the Fed. Yellen said:
Last month’s events show us that our work is not yet done. The authority for emergency interventions is critical. But equally as important is a supervisory and regulatory regime that can help prevent financial disruptions from starting and spreading in the first place.
It is important to note that the collapse of these banks raised questions about the role of digital assets in the banking industry and the need for proper risk management and oversight. As the digital assets industry is growing, an increasing number of financial institutions have been showing their interest in this regard. To this, the US regulators published a report highlighting their concerns.
Notably, the threats of the crypto sector impacting traditional finance have been haunting the regulators. In February, The US Senate Banking Committee discussed in length the measures to shield the traditional financial system from the vices of crypto. While testifying to the Committee, Lee Reiners, policy director at the Duke Financial Economics Center, recommended that banking agencies restrict the crypto industry from accessing the banking system.