The Financial Services Oversight Council (FSOC), which was created by the Dodd-Frank Act to focus on systemic risk issues, has been slow to design systems or create an effective infrastructure to head off a repeat of 2008. In response, the newly formed Systemic Risk Council (SRC) has thrown down the gauntlet, calling on the FSOC and U.S. regulators to step up addressing the forces that caused the market collapse four years ago and that continue to threaten the world financial marketplace.
This private sector group — chaired by former FDIC Chair Sheila Bair and co-sponsored by CFA Institute and Pew Charitable Trusts — is focusing on this general lack of progress, noting the FSOC’s duty to recommend prudential measures, monitor and identify threats, and develop and use the Office of Financial Research (OFR) as a few of the areas in which work is sorely needed.
The SRC boasts an impressive membership roster of former regulators, and financial and legal experts who know what they’re talking about, including the likes of CFA Institute President and CEO John Rogers, Brooksley Born (former CFTC chair), Bill Donaldson (former SEC chair), Paul O’Neill (former U.S. Treasury secretary), and former U.S. Senators Bill Bradley, Chuck Hagel, and Alan Simpson, among others. Former Fed Chair Paul Volcker serves as senior adviser to the group.
While reserving latitude to consider a range of relevant issues, the SRC cites six areas on which it believes the FSOC should focus its immediate efforts:
- Act immediately to propose and finalize rules which will substantially strengthen both the quality and amount of capital which must be held by the nation’s largest financial institutions.
- Expedite determination and designation of all systemically important nonbank financial institutions (SIFIs) and rules for capital requirements, resolution planning, examination, and data collection to avoid a repeat of the 2008 financial crisis where risk taking in the “shadow sector” caused widespread damage to the financial system.
- Activate a fully functioning OFR data collection and analytics system, including the integration of data collected by individual FSOC agencies and secure Senate confirmation of a director for the OFR.
- Expedite analysis and resolution of the challenges in applying the Volcker Rule with the goal of simplifying the regulation, while maintaining appropriate market making and risk management activity.
- Complete consistent rule-makings for greater oversight and transparency in the OTC derivatives market, including centralized clearing of and use of execution facilities for standardized contracts, robust margining and capital requirements, position limits, and other measures necessary to address harmful speculation and systemic contagion, including the credit derivatives markets.
- Focus on the need for international coordination of prudential and functional regulators, including the sharing of data, to ensure that global policymakers are aware of growing threats to financial stability.
Weighing in on systemic risk issues is no easy undertaking, especially given the global interconnectedness in the financial markets. But while this may seem like a formidable task, this endeavor is in good hands — at least one source has dubbed this group “banking watchdogs” and a “band of outlaw regulators.”