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House GOP Targets Shadow Bank Regulations

A top House Republican wants to overturn a recent federal regulation governing non-bank financial companies.

Rep. French Hill (R-Ark.) introduced a resolution Wednesday (April 17) that would yank the approval of the Financial Stability Oversight Council (FSOC)’s guidance on non-bank financial company determinations, adopted last fall.

“This guidance transforms FSOC into a roving regulator, aiming to bring entities under the Fed’s control for seemingly and, potentially, partisan purposes, rather than addressing true systemic risks,” Hill said during a House Financial Services Committee hearing.

He said that FSOC is “acting as a hammer, looking at everything in their risk category as a nail,” and called for a “coordinated approach that examines activities-based risk within the financial system and subsequently works with market participants.”

FSOC updated its guidance for non-bank financial company determinations last November. This guidance establishes the council’s procedures for “considering whether to designate a non-bank financial company for Federal Reserve supervision and prudential standards” under the Dodd-Frank Act.

The council first proposed the rules for designating non-banks — sometimes also called “shadow banks” — a “systemically important financial institution,” (SIFI) in April of last year, in the weeks after the collapse of Silicon Valley Bank and two other regional lenders.

This year has seen regulators around the world pay closer attention to the non-bank lending sector, which has amassed more than $1 trillion in debt, with little information about the risks these companies are taking.

Michael Hsu, acting head of the Office of the Comptroller of the Currency, told the Financial Times earlier this year that he thought the loosely regulated lenders were causing banks to make lower-quality and higher-risk loans.

“We need to solve the race to the bottom,” Hsu said. “And I think part of the way to solve it is to put due attention on those non-banks.”

And in February, Bank of England Deputy Governor Sarah Breeden called for more research into non-bank lenders, saying this effort would help prevent a “credit crunch” that could result from a pull-back by hedge funds, pension funds, asset managers and insurers.

“A shift in the willingness of market-based finance to lend to corporates, particularly those perhaps that are highly leveraged, would have significant implications for the real economy — a credit crunch sourced in market-based finance rather than bank lending,” Breeden said during a Bank of England Conference.