FSOC

In a contentious House Financial Services Committee oversight hearing, Treasury Secretary Scott Bessent sidestepped questions on the Trump family crypto conflicts of interest and inflation with pugnacious responses to Democratic lawmakers' questions.

Treasury Secretary Scott Bessent is slated to testify in the House Financial Services Committee Wednesday morning as part of the committee's regular oversight of the Financial Stability Oversight Council.

Major nonbank financial trade groups asked Treasury Secretary Bessent to scrap 2023 guidance expanding nonbank designations, citing cost and competitiveness concerns.

A group of more than 50 bipartisan financial experts, including former Fed Chairs Ben Bernanke and Janet Yellen, said that effectively eliminating the Office of Financial Research and weakening the Financial Stability Oversight Council would have devastating effects for the financial system.

The Financial Stability Oversight Council's annual report underscores mounting challenges in commercial real estate, escalating cyber threats, and regulatory gaps in third-party services and stablecoins, urging stronger oversight and legislative action.

The incoming Trump administration is expected to prioritize an activities-based oversight approach to nonbank entities, just as the Biden administration has. It may also leave its designation power intact, but unused.

As nonbank entities expand their market share in many traditional banking services and are increasingly intertwined in the banking system, regulators' approach to leveling the playing field has been incremental and situational.

Acting Comptroller Michael Hsu Wednesday suggested the Financial Stability Oversight Council adopt a "tripwire approach" for systemic risk assessment, using systemic risk metrics to advance designations.

Sen. Jack Reed, D-R.I., also brought up concerns with synthetic risk transfers and so-called shadow banks, which he said are shifting risk from outside the banking system into private credit markets.

House Financial Services Committee Chair Rep. Patrick McHenry, R-N.C., pressed the Financial Stability Oversight Council on the resurrection of its ability to designate nonbanks as systemically important.

The Financial Stability Oversight Council is clearing the administrative road to designate nonbank firms and activities as systemically risky, but if it wants those designations to stick it needs the public on its side.

The banking industry and consumer advocates praised the Financial Stability Oversight Council's move to reinvigorate its authority to regulate nonbanks. But that effort is going to take time and is guaranteed to face political headwinds.

The Financial Stability Oversight Council proposed two measures that would enable the body to more easily designate nonbanks as systemically important, a move expected to revive Dodd-Frank era debates between Republicans and Democrats.

The Financial Stability Oversight Council issued a pair of proposals that would enhance transparency into how the council designated nonbank firms and activities as systemically risky and simplify its process for designations.

In a letter to Treasury Secretary Janet Yellen, Sen. Sherrod Brown, D-Ohio, said regulators should have supervisory authority over crypto activity.

The report from the Financial Stability Oversight Council on cryptocurrency also urges action to prevent regulatory arbitrage and for regulators to study direct access to markets by retail customers.

Critics of the council say it hasn’t been as effective as it could be, but Treasury’s Nellie Liang said in an interview that right now it is “in a good place.”

Regulators and the Biden administration are considering how to respond to the sharp growth in digital assets pegged to fiat currency. Their options include establishing rules like those for bank deposits and having the Federal Reserve issue a digital dollar that competes with private-sector stablecoins.

Members of the Financial Stability Oversight Council are trying to light a fire under banks to adopt an alternative to the foundational reference rate.

President Biden plans to direct his administration to develop a strategy on climate-related risks for public and private financial assets, according to a draft document seen by Bloomberg News.