US to lower barriers on imposing 'too big to fail' label on firms

WASHINGTON — US regulators voted Friday to undo rollbacks under the Trump administration that made it tougher to place certain financial companies under heightened supervision — if they posed stability risks.

The decision came at a meeting of the Financial Stability Oversight Council (FSOC), a body created in the wake of the 2008 global financial crisis.

"Recent stresses in some financial sectors arising from the onset of the pandemic and the sudden failures of some regional banks underscore the continuing need to remain vigilant to threats," said Treasury Secretary Janet Yellen, who chairs the council, on Friday.

Other FSOC members include the chairs of the Federal Reserve and Securities and Exchange Commission.

The latest move aims to "remove unwarranted hurdles" to designating nonbank financial companies, imposed by 2019 guidance, said the council.

This means the companies would be subject to heightened government supervision.

Such firms that have been designated in the past include MetLife, Prudential Financial and General Electric Capital under the Obama administration.

Earlier rules called for the FSOC to undergo steps like a cost-benefit analysis and assess a company's likelihood of "material financial distress", before considering the firm for designation.

But such steps "unduly hamper" the council, said guidance released Friday.

They would also obstruct its ability to respond to financial stability risks in a timely manner, the council added.

The latest guidance rolls back the definition of what constitutes a threat to US financial stability as well — which under the 2019 rules required "severe damage on the broader economy".

"The Council has determined that this definition was overly restrictive" it said, adding that this clashed with its purpose of responding to emerging threats.

Massachusetts Democratic Senator Elizabeth Warren urged in a letter Thursday for the FSOC to "fully exercise its designation authority".

Nonbanks have expanded quickly and provide some 60 per cent of all consumer and business credit, she said, warning of the risks non-bank mortgage lenders pose in particular.

But the Mortgage Bankers Association (MBA) has pushed back against regulators' plans.

If regulators designate independent mortgage bank servicers as systemically important institutions subject to greater supervision, this "would negatively affect the mortgage market and consumers," said MBA President Bob Broeksmit in a recent blog post.

The FSOC stressed Friday that it does not prioritise its ability to designate companies above other ways to mitigate risks.