Washington DC(CNN) Following last month’s turmoil in the banking industry, financial regulators on Friday proposed a more comprehensive approach to identifying and addressing threats to financial stability.
US Treasury Secretary Janet Yellen has released a new framework proposed by the Financial Stability Oversight Council that outlines vulnerabilities in the financial system and the tools regulators can use to address those risks.
“Emergency intervention powers are important, but so are oversight and regulatory regimes that help prevent financial turmoil from starting and spreading,” Yellen said at an FSOC meeting.
The proposal also overturns guidance issued in 2019 that made it more difficult for non-bank financial firms, such as hedge funds and insurance companies, to be designated as systemically important institutions.
“Specified tools will serve as a key part of the post-global financial crisis defense,” Yellen said. “This is an important preventative tool to address the systemic risks that may arise from activities that could threaten the financial system and non-bank financial companies that may find themselves in distress.”
The FSOC has the authority to designate nonbank financial institutions as systemically important when their failures pose a threat to financial stability.
Financial firms identified for designation undergo a two-step evaluation process in which the FSOC gathers information from regulators and the firms themselves before voting on a decision. Companies can request a hearing if the FSOC makes a proposed designation.
Earlier guidance that made the designation more difficult could take six years to complete, Yellen said, adding that “the Security Council will act to address emerging risks to financial stability before it’s too late.” It is an unrealistic timeline that could prevent us from doing so.”