Ahead of Key Meeting, Warren Urges Financial Stability Oversight Council to Address Risks from Giant Nonbank Financial Institutions
“Past financial crises have demonstrated how nonbanks could be catalysts of future financial crises. FSOC has the opportunity to act now to protect the U.S. financial system.”
Nonbank Financial Institutions Like Hedge Funds, Insurance Companies, and Asset Managers, Were Major Contributors to 2008 Financial Crisis and Pose Growing Threats to Financial Stability
Washington, D.C. – U.S. Senator Elizabeth Warren (D-Mass.) sent a letter to Secretary of the Treasury Janet Yellen, in her capacity as Chair of the the Financial Stability Oversight Council (FSOC) urging FSOC to finalize its proposed interpretive guidance on nonbank financial company designations, and to use those authorities to designate and subject nonbank entities to heightened regulation to mitigate the risks they pose to the stability of the financial system. The letter was sent the day before FSOC’s key November 3 meeting, when it is scheduled to take up the guidance.
“Nonbank financial institutions (nonbanks) were ‘major contributors’ to the 2008 financial crisis and also posed evident risks to the financial system during the 2020 COVID-19 pandemic. The rapid growth of these entities – hedge funds, insurance companies, asset managers, money market funds, and more – and their aggressive lending calls for an ‘urgent need’ to address their growing threats to U.S. financial stability,” wrote Senator Warren.
The 2008 financial crisis demonstrated how the failure of large financial firms that are not regulated depository institutions but which “serve as intermediaries to channel savings into investment” – or so-called “shadow banks” – could threaten the safety and soundness of the financial system. In response, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (DFA) authorized FSOC to designate certain nonbank financial companies and financial market utilities as a “systemically important financial institution” (SIFI) and subject those entities to “heightened prudential regulation” by the Federal Reserve if their failure would harm U.S financial stability.
SIFI designations allow regulators to apply a standard set of rules to large and important financial institutions of all kinds, and during the Obama administration, FSOC used its authorities to designate four nonbanks as systemically important: American International Group (AIG) – which received roughly $182 billion in bailout funds from the U.S. government during the financial crisis – Prudential, MetLife, and GE Capital. However, during the Trump administration, FSOC dropped SIFI designations for these risky institutions and weakened its own regulatory powers.
Senator Warren applauded FSOC for taking important steps under the Biden administration to strengthen its designation process to protect the stability of the financial system, proposing changes to (1) eliminate a statement from the 2019 Interpretative Guidance that calls for the Council to rely on federal and state regulators to address risks before the Council considers potential designations, (2) implement an analytic framework that increases public transparency into how the Council evaluates risks to financial stability, and (3) drop language from the 2019 Interpretive Guidance that requires the Council to perform a cost-benefit analysis that considers a firm’s material financial distress. She called on FSOC to finalize this proposed guidance to remove previous interpretations that would hamper the Council’s ability to use its authority, and use this authority to ensure nonbanks don’t harm financial stability.
“FSOC must act now given that nonbanks have expanded rapidly and now provide almost 60 percent of all consumer and business credit. I am especially concerned by how their inherent vulnerabilities are amplified in light of the current risks caused by rising interest rates: the losses in commercial real estate and the leveraged lending market are among those growing risks… By taking on these risks with no oversight or accountability, nonbanks have spread these vulnerabilities across the financial system. Any shocks to a nonbank lender, such as rising defaults given high interest rates, could ripple out and overwhelm the entire economy’s financial stability,” continued Senator Warren.
“FSOC must quickly finalize its proposed guidance interpretations to ‘enhance (its) ability to address financial stability risks.’ But finalizing the proposed interpretive guidance is not enough. FSOC must also exercise its designation authority to effectively carry out its responsibility of addressing potential risks to the U.S. financial system before they destabilize the system. Past financial crises have demonstrated how nonbanks could be catalysts of future financial crises. FSOC has the opportunity to act now to protect the U.S. financial system, and I urge the Council to make a swift decision to do so at its upcoming meeting,” concluded Senator Warren.
Senator Warren led oversight work to hold the Trump administration accountable for undermining FSOC’s ability to designate nonbanks as systemically important financial institutions (SIFIs) and urged financial regulators to act to protect the stability of the financial system:
- In April 2023, Senator Warren released a statement applauding FSOC issuing new guidance for designating nonbank financial companies for Federal Reserve supervision and enhanced prudential standards.
- In May 2022, at a hearing of the Senate Banking, Housing, and Urban Affairs Committee, Senator Warren questioned Treasury Secretary Janet Yellen about the Trump administration’s actions to undermine FSOC’s ability to designate nonbanks as SIFIs. In response to Senator Warren's questions, Secretary Yellen agreed that FSOC’s oversight abilities needed to be strengthened again
- In March 2021, at a hearing of the Senate Banking, Housing, and Urban Affairs Committee, Senator Warren called for BlackRock, the world’s largest asset management firm, and other giant nonbank financial firms to be designated as SIFIs.
- In November 2018, Senator Warren sent a letter to then-Treasury Secretary Steven Mnuchin, Federal Reserve Chairman Jerome Powell, then-Comptroller of the Currency Joseph Otting, then-Federal Deposit Insurance Corporation Chairman Jelena McWilliams, and then-Securities and Exchange Commission Chairman Jay Clayton, expressing concern about the rapid growth of leveraged corporate lending and the inadequate response from FSOC and federal regulators.
- In October 2017, Senators Warren and Sheldon Whitehouse (D-R.I.) raised serious concerns about FSOC’s decision to remove American Insurance Group's designation as a SIFI and the risks this poses to the financial system.
- In July 2017, Senators Warren and Whitehouse wrote to then-Treasury Secretary Steve Mnuchin in his role as the FSOC chair, requesting information on whether Carl Icahn communicated with any FSOC members as the council considers whether to reverse the designation of American Insurance Group as a SIFI. At the time, Icahn, who served as a special adviser to President Trump and maintained a large stake in AIG.
- In April 2016, Senator Warren and then-Representative Elijah Cummings (D-Md.) released a Government Accountability Office report documenting the dramatic growth of nonbank mortgage servicers and details the need for stronger regulatory oversight of the industry.
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