Views on improving the integrity of global capital markets
18 June 2012

New Systemic Risk Council Challenges U.S. Regulators to Step up Monitoring Efforts

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.”

About the Author(s)
Linda Rittenhouse, JD

Linda Rittenhouse, JD, was a director of capital markets policy at CFA Institute. She focused primarily on issues related to investment products and investment regulation. Rittenhouse holds a JD degree.

2 thoughts on “New Systemic Risk Council Challenges U.S. Regulators to Step up Monitoring Efforts”

  1. Lloyd Clucas says:

    I see no reference to encouraging prosecution of top executives in mortgage and investment banking firms for mortgage fraud, securities fraud, or theft-by-fraud. As far as I can tell there have been 1 1/2 serious criminal prosecutions stemming from the massive heist that was the peddling of “sub-prime” mortgages.

    Nor do I see reference to treating CDS as either gambling or insurance contracts. Absent Congressional legislation exempting them, they are one or the other.

    Nor do I see concern expressed about the Federal Reserve using monetary policy to encourage asset bubbles.

    Nor do I see any effort to dissuade Congress and the Executive branch from coercing banks into unsound lending practices.

    More regulation is NOT the answer. If the crimes are big and lucrative enough, politics impede effectiveness. If the big items cannot be dealt with by regulation, then all they really accomplish is adding to costs, with no systemic benefit. The resources should go elsewhere….

    Criminal prosecutions MAY be an answer. Pity it has neither been tried nor advocated. This past financial debacle presented such a target-rich environment. Dawdling to date has let hundreds of the bad guys off the hook as the statutes of limitation run. No new criminal laws are required. They are all on the books. They just need the political will to enforce them. That requires some real advocacy.

  2. Do you really want to stop the forces that caused the market collapse four years ago and that continue to threaten the world financial marketplace?



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