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House Financial Services Committee Republicans urged US Treasury Secretary Scott Bessent to rescind a Biden-era measure that gave regulators a pathway for placing nonbank financial firms under greater oversight, saying it did little to improve risk monitoring. The lawmakers’ request to Bessent in his capacity as chair of the Financial Stability Oversight Council seeks to curtail the panel’s ability to designate hedge funds and investment companies as systemically important. That too-big-to-fail tag, which brings significant compliance costs, has mostly been applied to large Wall Street banks since its introduction more than a decade ago.
When financial institutions and firms “are forced to devote increasing time and resources to building compliance systems to navigate new rules and guidance, fewer firms will be able to compete and make the economy flourish,” Chairman French Hill and eight other lawmakers wrote in a letter. FSOC laid out the pathway in 2023 after warning that oversight of nonbanks hadn’t kept pace with the firms’ expanded footprint across the financial sector, with then Treasury Secretary Janet Yellen saying at the time there would be strong procedural protections for companies under review. While regulators had not taken any steps to use that pathway, nonbanks had expressed unease about the possibility of being deemed systemically important.
Jeremy Kress, a former Fed bank-policy attorney who now teaches business law at the University of Michigan, warned of the US being unarmed if the need arose to tag a nonbank firm as systemically important. “There is near-universal agreement among domestic and international regulators that nonbank financial companies like hedge funds and insurance companies can pose systemic risks,” he said. “Designating individual nonbanks for heightened oversight is one of the only tools US regulators have to respond to these risks.
Unilaterally taking that tool off the table would be a grave mistake.” The Treasury Department didn’t immediately respond to a request for comment. With assistance from Daniel Flatley.
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