Companion House-Senate Bills Designate Council of Regulators as Systemic Risk Regulator

Rep. Mike Castle, a senior member of the House Financial Services Committee, has introduced legislation, H 1754, to create a systemic risk regulator. The measure is a companion bill to S 644, a measure introduced by Senator Susan Collins that would create a new federal systemic risk regulator to monitor the financial markets and oversee financial regulatory activities. Eschewing the Federal Reserve Board for such a role, the companion bills, both named the Financial System Stabilization and Reform Act, would create an independent Financial Stability Council to serve as systemic risk regulator. The Financial Stability Council would be composed of representatives from the Fed, the SEC, the CFTC, the FDIC and the National Credit Union Administration. The council would maintain comprehensive oversight of all potential risks to the financial system, and would have the power to act to prevent or mitigate those risks.

Recently, SEC Chair Mary Schapiro told the Senate Banking Committee that the Commission favors a college of regulators for systemic risk rather than a single systemic risk regulator. Banking Committee Chair Christopher Dodd also endorsed a council of regulators for systemic risk. Ms. Schapiro specifically made favorable mention of S 664.

Given the regulatory failures leading up to this crisis, Senator Dodd has concerns about systemic risk authority residing exclusively with any one body. For example, there have been problems with regulated bank holding companies where they have not been well-regulated at the holding company level. That is why the Banking Committee Chair is intrigued by the idea of a council approach to addressing systemic risk.
The new Financial Stability Council would be led by a chair nominated by the President and confirmed by the Senate, with the responsibility for the day-to-day operations of the council.

The chair would be required to appear before Congress twice a year to report on the state of the country's financial system, areas in which systemic risk are anticipated, and whether any legislation is needed for the Council to carry out its mission of preventing systemic risks
As financial institutions speculated in increasingly risky products and practices leading to the current crisis, not one federal financial regulator was responsible for detecting and assessing the risk to the system as a whole. The financial sector was gambling on the rise of the housing market, yet no single regulator could see that everyone, from mortgage brokers to credit default swap traders, was betting on a bubble that was about to burst. Instead, each agency viewed its regulated market through a narrow lens, missing the total risk that permeated the financial markets.

In order to prevent this problem from recurring, Senator Collins envisions a single financial regulator tasked with understanding the full range of risks faced by the final system. This regulator will also be authorized to take proactive steps to prevent or minimize systemic risk. The legislation guarantees holistic regulation of the financial system as a whole, not just its individual components. The bills reject the idea of a single regulator, such as the Fed, being given systemic powers in favor of a body made up of the key federal financial regulators in favor of collaborative systemic risk oversight.

Under the bills, whenever the Financial Stability Council believes that a risk to the financial system is present due to a lack of proper regulation, or by the appearance of new and unregulated financial products or services, it would have the power to propose changes to regulatory policy, using the statutory authority provided to existing federal financial regulators.

The Council would also have the power to obtain information directly from any regulated provider of financial products and, in limited form, from state regulators regarding the solvency of state-regulated insurers.

The Council will also be able to propose regulations of financial instruments which are designed to look like insurance products, but that in reality are financial products which could present a systemic risk. But Senator Collins assured that the bill does not preempt state law governing traditional insurance products.

The measure empowers the Council to address the `too big to fail'' problem by adopting rules designed to discourage financial institutions from becoming ``too big to fail'' or to regulate them appropriately if they become systemically important financial institutions.

Under the legislation the Council would help make sure financial institutions do not become ``too big to fail'' by imposing different capital requirements on them as they grow in size, raising their risk premiums, or requiring them to hold a larger percentage of their debt as long-term debt. Senator Collins clarified that the Council’s power is not meant to restrict financial institutions from growing in size, but rather from becoming risks to the system as a whole.