The Financial Stability Oversight Council (FSOC) voted Wednesday to narrow the criteria under which non-bank firms could be designated as systemically important financial institutions. The council's action pares back a Biden-era framework intended to identify hedge funds and investment firms that could pose systemic risk to the broader financial system.
Under the existing designation regime, a firm tagged as systemically important faces substantial compliance obligations and may be placed under Federal Reserve supervision. Since the designation was introduced more than a decade ago, it has most often been applied to large Wall Street banks.
Treasury Secretary Scott Bessent, who leads the council, told members at the meeting that the change is meant to leverage agencies' current regulatory authorities to address threats to financial stability. A Treasury official said the proposed approach would rethink how potential problems are identified and introduce greater rigor into the consideration process for non-bank designation.
FSOC officials originally published a framework for such designations in 2023 after warning that oversight of non-bank entities had not kept pace with their growing presence across the financial sector. At the time, then-Treasury Secretary Janet Yellen said companies under review would receive strong procedural protections.
The council's move to tighten the threshold for designation drew swift criticism from Democratic Senator Elizabeth Warren. In a statement released Wednesday, Warren warned of possible risks linked to artificial intelligence, private credit growth and turbulence in the oil markets. She argued the change would weaken the financial system's resilience, saying, "Instead of strengthening the resilience of the financial system in the face of these risks, the Trump Administration is doing the opposite."
The proposal, as described by Treasury officials, seeks to introduce a new methodology for spotting potential issues and to add stricter standards for when a non-bank firm can be deemed systemically important. Proponents characterize the change as a way to better deploy existing regulatory tools, while critics say it could reduce oversight of rapidly expanding non-bank activities.
By narrowing the circumstances under which non-banks can receive the designation, the council could alter which firms face higher compliance costs and Federal Reserve oversight. The debate underscores ongoing tensions between tightening procedural safeguards for firms under review and ensuring regulators can respond to emerging threats outside the traditional banking sector.