In a move that reflects concerns about the stability of the US financial sector, regulators in the United States voted on Friday to reverse the rollbacks introduced during the Trump administration. These rollbacks had made it more challenging to subject certain financial companies to heightened supervision if they were deemed to pose risks to financial stability.
The decision was made at a meeting of the Financial Stability Oversight Council (FSOC), which was established in the aftermath of the 2008 global financial crisis to monitor and address systemic risks in the financial system.
Treasury Secretary Janet Yellen, who chairs the council, emphasized the need for vigilance in the face of ongoing financial threats. She pointed to recent stresses in various financial sectors resulting from the onset of the COVID-19 pandemic and the sudden failures of regional banks. The implication is that the Trump-era policies, which aimed to reduce regulatory oversight, might have left the financial sector exposed to significant risks.
Among the FSOC’s members are the chairs of the Federal Reserve and the Securities and Exchange Commission, emphasizing the gravity of the decision.
The key objective of this regulatory change is to “remove unwarranted hurdles” that had been placed on the designation of nonbank financial companies, as previously imposed by 2019 guidance. Nonbank financial companies that meet specific criteria would now be subject to heightened government supervision.
Historically, firms like MetLife, Prudential Financial, and General Electric Capital were designated as systemically important financial institutions under the Obama administration. The former rules required the FSOC to follow a detailed process, including a cost-benefit analysis and an assessment of the likelihood of a company experiencing “material financial distress,” before considering the company for designation.
The council, under the latest guidance, argued that these steps unduly restricted its ability to respond promptly to financial stability risks, rendering the process cumbersome and less effective.
Additionally, the revised guidance broadens the definition of what constitutes a threat to US financial stability, moving away from the 2019 definition, which required “severe damage to the broader economy.” The FSOC claimed that this previous definition was overly restrictive and didn’t align with its purpose of addressing emerging threats promptly.
Massachusetts Democratic Senator Elizabeth Warren had called for the FSOC to fully exercise its designation authority. She highlighted the rapid expansion of nonbank financial institutions, which provide approximately 60% of all consumer and business credit. Of particular concern were non-bank mortgage lenders and the risks they might pose to the financial system.
However, the Mortgage Bankers Association has expressed reservations about regulators’ intentions. If independent mortgage bank servicers are designated as systemically important institutions subject to increased oversight, it could negatively impact the mortgage market and consumers.
The FSOC has clarified that its move to reverse these rules is not indicative of prioritizing its ability to designate companies over other risk mitigation strategies. It aims to strike a balance between maintaining financial stability and supporting the continued growth of the financial sector.
The recent struggles in the USA banking sector have raised concerns about the financial system’s stability, leading some individuals and investors to turn to alternative assets like Bitcoin. The crypto market, including Bitcoin, has gained attention and investment as a potential hedge against economic turmoil and banking sector instability. Here are some key factors contributing to the increasing interest in Bitcoin amid the challenges faced by traditional banking:
- Economic Uncertainty: Economic challenges, including inflation, low interest rates, and a growing national debt, have eroded confidence in traditional financial institutions. Bitcoin’s scarcity and decentralized nature are seen as qualities that could provide stability and security in uncertain times.
- Diversification: Investors are increasingly looking to diversify their portfolios and reduce their exposure to traditional assets. Bitcoin, as a non-correlated asset, offers diversification benefits that can help protect against systemic risks.
- Store of Value: Bitcoin’s digital gold narrative has gained prominence. Many investors view it as a store of value akin to gold, which can retain its worth during economic downturns.
- Institutional Adoption: High-profile institutions, including corporations and financial firms, have entered the Bitcoin market. This institutional endorsement has increased Bitcoin’s legitimacy and attractiveness as an investment.
- Hedge Against Inflation: Bitcoin is often touted as a hedge against inflation, which has been a growing concern as central banks have implemented expansionary monetary policies. The fixed supply of Bitcoin can act as a safeguard against currency devaluation.
- Accessibility: The increasing availability of Bitcoin through various exchanges and investment platforms has made it easier for individuals to invest in the cryptocurrency. This accessibility has contributed to its growing popularity.
- Global Appeal: Bitcoin’s decentralized nature makes it appealing to a global audience. It is not tied to any specific country or central bank, making it a potential safe haven for individuals worldwide.
Shayne Heffernan
