The proliferation of activities of non-bank financial institutions – including their risk to financial stability – are of particular concern to the outgoing board chairman of the bank deposit insurance agency, he said in remarks Tuesday.
Martin J. Gruenberg, who will leave his post Jan. 19 as board chairman of the Federal Deposit Insurance Corp. (FDIC), said in a speech to the Brookings Institution in Washington, D.C., that the Financial Stability Oversight Council (FSOC) has “repeatedly” pointed out risks growing outside the regulatory perimeter ranging from hedge funds to private credit lenders to non-bank mortgage servicing companies.
He contended that progress was made since the 1980s with improved capital and liquidity requirements, strengthened regulation of derivatives markets, and resolution planning. However, he said, the largest banks are bigger, more complex, and deeply interconnected domestically and internationally.
“I am concerned that memories are short,” Gruenberg said. “We should not allow the current relative stability of the banking and financial systems to lull us into a false sense of complacency. Not only are many people not familiar with the thrift and banking crises of 30 years ago, some seem to have lost sight of the experience of the Global Financial Crisis of 2008 and even the regional bank failures of the spring of 2023.”
Gruenberg called new technologies, new financial products, and new kinds of financial companies “part and parcel of the evolution of the financial system” experienced over the years.
“But we should not kid ourselves into believing that they do not present risks that need to be carefully supervised and, if necessary, regulated,” Gruenberg said.
He said that is the core lesson of three financial crises he experienced over the years – the thrift and banking crisis of the 1980s and early 1990s, the global financial crisis of 2008, and the three large regional bank failures in the spring of 2023 – “to which I hope we pay close attention.”
Gruenberg’s comments about non-bank financial institutions are in contrast to those of his likely successor, FDIC Vice Chairman Travis Hill. Last week, Hill told an audience that he expects the agency in the future to take a more “open-minded approach” to innovation and technology adoption, while still promoting core safety and soundness principles. He asserted that the agency has done a “poor job” in recent years striking a balance between allowing banks to evolve with the times and ensuring that they continue to manage risks prudently.
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