Nonbank financial institutions have become an integral part of the financial services landscape, and as a result, banks and nonbanks need to be viewed as “an interconnected whole and overseen accordingly,” FDIC Chairman Martin Gruenberg said today. In a speech on financial stability risks posed by nonbanks, Gruenberg said that nonbanks can transmit risk into other parts of the financial system and “seriously hamper” the credit and financial intermediation needed to support the economy.
Gruenberg noted that the Financial Stability Oversight Council can designate nonbanks as subject to heightened supervision and resolution planning requirements, and the council recently proposed new guidance for how it would make those determinations. However, the issue remains that once a nonbank receives an FSOC designation, it moves from virtually no regulation to full regulation. “Consideration should be given to the development of a more tailored process that reduces undue financial system risk while applying prudential regulation and resolution planning requirements that are fit for purpose in the context of a particular nonbank financial institution’s risks,” he said.
Gruenberg also responded to concerns that proposed interagency capital requirements for banks with at least $100 billion in assets would cause more banking services to shift to nonbanks. “The obvious response to that is there should be appropriately strong capital requirements for those activities in the banks, complemented by greater transparency, stronger oversight and appropriate prudential requirements for nonbanks,” he said. “That would be the most effective and balanced way to enhance the stability of the entire financial system.”