(Bloomberg) -- The US government laid out a pathway for placing firms other than banks under strict Federal Reserve oversight, a major regulatory threat to hedge funds and investment companies.
After months of back-and-forth, Washington's top financial officials on Friday released a new framework for designating financial firms as systemically important. That too-big-to-fail tag, which brings significant compliance costs and regulatory headaches, has mostly been applied to large Wall Street banks since its introduction more than a decade ago.
During a Friday meeting of the Financial Stability Oversight Council, Treasury Secretary Janet Yellen and other authorities didn't identify any firms that could be designated. Rather, the group of the Biden administration's top regulators described a new framework for doing so as a necessary step to root out lurking risks in the financial system.
“In voting to adopt the analytic framework and guidance, we will increase the transparency of the council's work and establish a durable process for the council's use of its designation authority, strengthening the council's ability to promote a resilient financial system that supports all Americans,” Yellen said.
The blueprint kick-starts a process that could result in significantly more oversight for some of the biggest names in finance that aren't banks. Still, on Friday, Yellen said that designations wouldn't be prioritized over other ways to minimize systemic risks.
Read more: Financial Titans Ready Fight Over ‘Too-Big-to-Fail' Threat
Yellen said there would be “strong procedural protections for companies under review, including significant council engagement and communication, and provides them with opportunities to be heard.”
The top regulators on Friday also revealed a new framework for financial stability risks to better explain how it evaluates and responds to potential dangers.
Biden Era
For months, Biden-era regulators have been warning that nonbanks' footprints across finance have significantly expanded, though oversight hasn't kept pace. Officials have said that unforeseen risks may be lurking as the firms have grabbed more market share, while their ties to traditional lenders have become more complex.
Read more: US Weighs Tighter Oversight of Nonbanks Posing Systemic Risk
The blueprint represents a stark reversal from the Trump era, when officials made it harder to designate firms.
Ahead of Friday's announcement, financial titans have been girding for a fight over the plans. Leading trade groups, including the Investment Company Institute, the Managed Funds Association and the Mortgage Bankers Association, have all urged regulators to tread carefully on asserting greater discretion and using a shorter timeline to designate a firm as systemically important.
Industry groups quickly criticized the move on Friday. Bryan Corbett, who leads the Managed Funds Association, said the guidance was “flawed.” He added that the designation process “introduces uncertainty for market participants, harming their ability to deliver for their investors, including pensions, foundations, and endowments.”
Investment Company Institute chief Eric Pan said the designation guidance backtracks from current standards, and that the move to make it easier to label a company as systemically important lacked justification.
“It is difficult to understand why members of FSOC think a less transparent, weaker process will produce wiser outcomes,” Pan said.
A Treasury official, who asked not to be identified discussing the plans, said the process for designation would involve substantial engagement with companies under review and their regulators.
Stages
The process would have stages, FSOC said in a statement. First, a company identified for a review would be subject to a preliminary analysis. The firm would then be notified at least 60 days before the council votes on whether to evaluate it further to allow the company to submit relevant information and meet with FSOC staff.
If it proceeds, a second stage would involve even more back-and-forth with the company and its regulator and further exchanges of information. At the end of that more in-depth evaluation, regulators would consider whether to formally propose designating the firm as systemically important. That step would require two-thirds of FSOC's voting members to agree.
If they advance the plan, the company could then request a written or oral hearing. After that, the council would vote to make a final decision, also requiring a two-thirds vote. Any designation would be revisited at least once per year, officials said.
Officials didn't give a time frame for how long the process could take. The Treasury official said that the last designation completed by FSOC took about a year and a half.
Earlier Friday FSOC officials also discussed developments in commercial real estate markets. Conditions there remain challenging following declines in prices and an increase in the cost of financing though delinquencies vary by property type, the Treasury said in a statement.
“The Council will continue to closely monitor developments in commercial real estate markets and financial institutions with significant exposures to commercial real estate and related risks,” the Treasury said.
--With assistance from Silla Brush.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.
Essential Business Intelligence, Continuous LIVE TV, Sharp Market Insights, Practical Personal Finance Advice and Latest Stories — On NDTV Profit.
