Yellen says FSOC to tighten rules on risk assessment, non-bank firms

By David Lawder

WASHINGTON (Reuters) – The Financial Stability Oversight Council on Friday is voting on a new framework to better identify and respond to stability risks and on revised guidance to make it easier to designate non-bank financial institutions for regulatory supervision, U.S. Treasury Secretary Janet Yellen said on Friday.

Yellen said in prepared remarks to an FSOC meeting that actions to mitigate banking system contagion from regional bank failures last month stabilized the financial system in recent weeks.

“And our banking system remains sound, with strong capital and liquidity positions,” Yellen said. “Of course, we continue to be vigilant and monitor conditions closely.”

But the banking sector turmoil showed that showed financial regulators’ “work is not done” and supervisory and regulatory changes are needed “to help prevent financial disruptions from starting and spreading in the first place.”

The two proposals are aimed at enhancing such safeguards, including a new framework that defines how FSOC, a multi-regulator body that polices risk in the U.S. financial system, will assess vulnerabilities and the transmission channels through which shocks can be transmitted throughout the financial system.

Yellen said that the designation of non-bank institutions as systematically important – a move that would subject them to Federal Reserve supervision – was made difficult by changes enacted in 2019 under the Trump administration.

The new guidance would drop “inappropriate hurdles” in the designation process, but would provide for a transparent process which provides for significant engagement and communication with non-bank firms under review.