Treasury Department proposes new tools to prevent financial system issues

Treasury Department proposes new tools to prevent financial system issues

The Financial Stability Oversight Council (FSOC), the Treasury Department’s risk oversight arm, has proposed a new framework to identify issues in the US financial system. This measure comes after the collapse of Silicon Valley Bank (SVB) and Signature Bank, which prompted efforts to prevent further damage to the economy. The framework has been approved by the council and will be released for public feedback. It will offer more transparency into the council’s operations and how it identifies systemic problems. This measure will be the first of its kind released by the council.

Treasury Secretary emphasizes the importance of comprehensive approach

Janet Yellen, the Treasury Secretary, emphasized the importance of taking a comprehensive and rigorous approach to prevent issues in the financial system. She stated that the council does not prioritize one type of tool over another, but plans its response to a given risk following an examination. The framework outlines common vulnerabilities and transmission channels through which shocks can propagate through the financial system. Yellen said that addressing the diverse range of financial vulnerabilities that exist today and may arise tomorrow requires a broad set of flexible tools.

FSOC proposes guidance to designate non-banks for financial oversight

The FSOC has also voted to issue proposed guidance that would enable it to use congressional authority to designate nonbank financial companies for supervision under the Federal Reserve Board when necessary. Yellen has not identified what companies could be designated, but overseeing more institutions is an important preventative tool to address systemic risks that may arise from a nonbank financial firm whose activities or distress could threaten the financial system. This measure has been applauded by Rep. Maxine Waters, D-Calif., ranking member of the House Financial Services committee, who said that the FSOC and regulators must remain vigilant and seek to quickly address vulnerabilities in the financial system without delay.

Both proposals will be released for a 60-day comment period, and the Treasury Department, along with the Federal Deposit Insurance Corp., will backstop depositors to prevent ripple effects from potential collapses. The Federal regulators shuttered both banks last month, seized their deposits, sold both entities to other financial institutions and prevented the largest banking crisis since 2008. The framework and guidance are expected to enhance the stability of the financial system and improve the ability of regulators to identify and address systemic risks.


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