Is Systemic Risk Council 'Set Up for Failure'?
Some see too many agencies, each with its own agenda.
Insurance Networking News, August 2, 2010
While the formation of the Financial Stability Council is meant to help regulators put an end to "too big to fail," many are wondering if the panel itself will prove too big to manage.
With so many members — 15 in total — each with varied points of view and priorities, there are significant questions about whether the council will be able to coordinate successfully.
Advertisement
The recently enacted regulatory reform bill created the council, but left many critical elements unclear, including how it will be staffed, whether its deliberations will be transparent and how it will determine which financial entities pose a threat to the economy.
"They are almost being set up for failure," said Wayne Abernathy, executive director of financial institutions policy and regulatory affairs for the American Bankers Association. "Their job is to get ahead of any systemic risk to occur. So if anything does get by them, they are set up to be blamed."
Unlike past interagency groups, like the President's Working Group, an informal collection of regulators, members have been given a strict mandate with statutory responsibilities to prevent the next crisis from happening.
But it is also far larger than any previous body designed to coordinate the agencies. Ten of the 15 members have voting rights and the council includes every major or minor player in the world of financial services regulation.
In addition to the heads of nine federal agencies, the council will include an insurance expert appointed by the president, three state representatives, and the heads of the Office of Financial Research and the Federal Insurance Office.
Many wonder if that is simply too many voices and competing interests to effectively operate in a council. Even relatively small boards, like the five-member Federal Deposit Insurance Corp., have had difficulties in the past agreeing on an appropriate course of action. The council could potentially be far worse, observers said.
"If you don't change the mind-set then you are going to revert back to the same kind of interagency groups we've had before without any effectiveness," said Kevin Jacques, Boynton D. Murch Chair in Finance at Baldwin-Wallace College and a former OCC and Treasury official. "The greatest danger to this systemic-risk regulation process is agencies simply go back to the same mind-set they had for other interagency groups which is, 'We will worry about our little sliver of it, but we won't worry about the big picture."
Observers wondered whether the glut of bodies on the council could lead to vote trading, when members may vote to support a particular agency on a certain issue they care little about in return for support for their own priorities.
For example, the Federal Reserve Board, Office of the Comptroller of the Currency and FDIC — the primary banking regulators on the council — could align in an effort to block a vote.
"It seems the potential for vote trading gets really high," said Phil Swagel, a visiting professor at the McDonough School of Business at Georgetown University and a former Treasury official. "That seems irresponsible but possible."
Some worry that the abundance of representatives could effectively give the Treasury Department, which will head the council, an outsize role in its decisions. Previously the Treasury was kept at arm's length from regulatory policy, but now it can help set the agenda for the council.
"Treasury gets to set the agenda and drive the discussion," said Chuck Muckenfuss, a partner at Gibson, Dunn & Crutcher LLP and a former deputy comptroller of the currency. "Combined with the research bureau, it greatly enhances the Treasury's role in financial oversight."
Others agreed. "We've always thought of the Fed as being the agency that worried about risk in the economy and Treasury was off doing something else," said John Douglas, a partner at Davis Polk & Wardwell. "This really puts Treasury right in the midst of thinking about systemic risk in our country."
Arguably even more problematic is the job the council is asked to do. According to the law, it must define systemic importance and determine which firms are systemically important.
Observers have questioned what criteria regulators will use to identify institutions that pose a risk to the economy. Among the areas the council is directed to consider include assets, leverage, size, liabilities and interconnectedness. It will be up to the council to figure out how to quantify such factors. "The first problem is no one has the faintest idea what systemic risk is, and this is the systemic-risk council, so the main problem is identifying what systemic risk is," said Peter Wallison, a fellow in financial policy studies at American Enterprise Institute.
For more information on related topics, visit the following channels:
