News Release: Repeal of Trump-Era Guidance Marks Key Step to Curbing Systemic Risk


April 21, 2023

Carter Dougherty 

Repeal of Trump-Era Guidance Marks Key Step to Curbing Systemic Risk
Yellen cites need to address “new areas of risk” to financial system

Washington, D.C. – Regulators should move promptly following the repeal of Trump-era guidance that hamstrung the Financial Stability Oversight Council (FSOC) to research, identify and designate potential new systemic risks, according to Americans for Financial Reform Education Fund.

“The banking crisis this year has demonstrated the importance of keeping a close eye on the buildup of risks in the financial system and the emergence of unanticipated systemic challenges,” said Andrew Park, senior policy analyst for private equity and hedge funds at Americans for Financial Reform. “The explosive growth of the nonbank sector over the last decade – often referred to as shadow banks — may harbor risks that regulators should know about sooner rather than later.”

FSOC, under the leadership of Treasury Secretary Janet Yellen, announced today that it would reverse the 2019 guidance of Trump-appointed regulators that effectively sidelined the body in carrying out the mandate Congress gave it under the 2010 Dodd-Frank Act to monitor systemic risk. FSOC also released a proposed framework for financial stability risk identification, assessment, and response.

The 2019 guidance, which AFR objected to strongly at the time, conflicted with congressional intent and made it unlikely that FSOC would ever designate any firm as being systemically important, and thus subject to greater scrutiny. AFR has since pushed repeatedly for FSOC to reverse this step so that regulators can have a fuller picture of risks in the whole financial system.

The last decade has seen a dramatic increase in the size and ubiquity of private markets that fall outside the traditional banking system or are exempt from many capital markets regulations. Private equity, hedge funds, private credit, money market funds, and asset management all have the potential for systemic risks. And as AFR demonstrated in a recent study on subprime corporate debt, the traditional banking system has deep links to them.

“Banks, especially Wall Street’s megabanks, are deeply interconnected with nonbank entities such as private equity firms and hedge funds, and the rapid flow of deposits into money market funds this year has highlighted how conditions in different markets have ripple effects across the system,” said Alexa Philo, senior policy analyst for banking at AFR. “All the regulators need to move quickly to understand the markets, the risks, and the potential remedies.” 

AFR has also pushed to reinvigorate the Office of Financial Research, which was also gutted by Trump appointees. The Senate should quickly confirm President Biden’s nominee to head the office, Ron Borzekowski.