Tomorrow, Treasury Secretary Lew will deliver his annual report on the Financial Stability Oversight Council (FSOC). Here’s three things you need to know about FSOC:
1. The FSOC is failing to effectively monitor and mitigate systemic risk
The Government Accountability Office (GAO) noted in an audit report to Congress in September 2012, the FSOC has “not developed a structure that supports having a systematic or comprehensive process for identifying potential emerging threats.” And just last month, witnesses testifying on behalf of the Federal Reserve and Federal Deposit Insurance Corporation (FDIC) -- both FSOC member organizations -- similarly failed to provide any metrics to identify “grave threats” to the nation’s financial stability.
Given the FSOC’s issues with even identifying threats, it’s clear the FSOC is presently incapable of effectively responding to those threats. This failure to explicitly prioritize systemic risks leaves policymakers without the information they need to allocate scarce resources to the most serious threats to our economy.
2. The FSOC is failing to effectively coordinate member-agency rulemaking
In the last year, the FSOC’s member agencies have publicly disagreed about the implementation of Basel III, swaps regulation, cross-border resolution, and the Volcker Rule. These disagreements create significant uncertainty for market participants, and this uncertainty imposes unnecessary costs on the economy. Unfortunately, as Congresswoman Ann Wagner’s recent questioning shows, the FSOC is unable to even identify these costs.
3. Despite it’s statutory purpose, FSOC fails to end too-big-to-fail
The Dodd-Frank Act directs the FSOC to “promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the U.S. government will shield them from losses in the event of failure.” But in its 2013 annual report, the FSOC candidly admits that the “credit rating agencies continue to factor a systemic support uplift into the long-term credit ratings of the largest U.S. financial institutions,” which denotes “the perception that the actions of government authorities during the recent crisis imply a guarantee” to institutions perceived to be “too big to fail.”
To put it more bluntly, the FSOC itself admits its own failure to fulfill its duty established by Dodd-Frank.
