No 525 Posted by fw, July 18, 2012
“The American public is looking for “a strong, independent voice” to help implement financial reforms, and the newly created Systemic Risk Council (SRC) can help achieve progress toward those goals by publicly urging aggressive action. In many ways, the financial system faces larger potential challenges today than it did in the run-up to the 2008 crisis, given the troubled state of the European Union and uncertainties at home related to fiscal and monetary policy. We simply cannot afford to let it happen again.” —Sheila Bair (Source: Systemic Risk Council is a “Strong, Independent Voice” to Help Implement Financial Reforms, June 18, 2012).
“People do what you inspect, not what you expect” —Louis V. Gerstner, Chairman of the Board, IBM
In A Call to Action, (June 18, 2012), the Systemic Risk Council finds the government’s Financial Stability Oversight Council (FSOC) “has done little to develop, much less implement, appropriate data gathering and other monitoring safeguards to both recognize and address in a timely manner underlying vulnerabilities in the U.S. financial markets system.”
Selected highlights from SRC’s report of FSOC failures follows a brief introduction to FSOC’s responsibilities. To read the complete report, click on Systemic Risk Council: A Call to Action, June 18, 2012. Additional information about SRC appears at the end of this post.
SRC Report: Progress by the Financial Stability Oversight Council (FSOC) under the Dodd-Frank Act
FSOC Responsibilities — The FSOC was chosen by Congressional leaders as the appropriate response to proper systemic risk oversight after months of debate and political haggling. Once implemented, the FSOC and its counterparts would answer questions about how to prevent future disruptions to the financial markets of the scale experienced worldwide during 2008-09. To that end, it was charged with three primary responsibilities:
FSOC PROGRESS DISAPPOINTS
1. Slowness to act
Despite the importance of this mandate, the FSOC has been slow to act in a number of ways. Created in part to design systems, processes and infrastructure to detect and prevent repeats of the world market turmoil in 2008, the FSOC has done little to develop, much less implement, appropriate data gathering and other monitoring safeguards to both recognize and address in a timely manner underlying vulnerabilities in the U.S. financial markets system.
Since mid-2010, the FSOC’s lack of progress has been disappointing:
2. Enormous consequences for failing to monitor and mitigate systemic risk
We recognize the enormity of creating an entity such as the FSOC. The task of effectively monitoring and mitigating systemic risk is both vast and procedurally complex. Yet, there are enormous consequences for failing to do so. In addition, known risks to the system – excess leverage, opaque and volatile derivatives markets, and use of the government safety net to support speculative, high-risk activities – have yet to be addressed even as new risks emerge on the horizon.
3. Inferior timeliness and substance of accomplishments raises concerns
Both the timeliness and substance of what has been produced have beset this effort since the FSOC’s inception. This immediately raises questions about:
4. Most glaring failure — duty to recommend prudential measures
Perhaps the most glaring shortcoming is the FSOC’s failure to designate any nonbank financial institutions as systemically important, as this alone lies at the heart of its mandate.
5. No action taken to fulfill duty to monitor and identify threats
As part of its oversight duties, the FSOC is supposed to monitor the financial services marketplace in order to identify potential threats to the financial stability of the United States. This includes the need to monitor domestic and international financial regulatory proposals and developments, including insurance and accounting issues, and to advise Congress and make recommendations in such areas that will enhance the integrity, safety, competitiveness and stability of the US financial markets.
In its 2011 Annual Report, the FSOC acknowledges this responsibility and discusses several areas that present “ongoing challenges to financial stability.” Yet, no formal action has been taken to address these threats and the relationship of the FSOC to the commitments made by the Group of Twenty in Washington and the newly-organized international Financial Stability Board remains unclear.
6. Failure to fully develop and use the Office of Financial Research (OFR)
To provide direct support to the FSOC, Congress created the OFR and instilled in it vital responsibilities for systemic data collection and analysis. The OFR was specifically given responsibility for, among other things, collecting information from agencies represented by the FSOC members, other federal and state regulatory agencies, the Federal Insurance Office and potentially from bank holding companies and nonbank financial companies, all in order to help assess risks to the US financial system. Moreover, in collecting and analyzing such matters, it was to be a primary link in coordinating systemic risk mitigation efforts globally.
To date, the work of the OFR has been limited. Though the President has nominated Richard Berner to head the OFR, the nomination has not been confirmed by the Senate. The OFR has announced its intentions to create an advisory committee to provide advice, recommendations, and analysis and information to the OFR, but no such committee has been created as of yet.
Perhaps most concerning, the OFR has failed to establish and activate a robust data collection process. As noted by many systemic risk experts, that process includes the ability to collect, analyze and model vast amounts of information about financial markets and participants.
Currently done to different degrees by individual FSOC member organizations, the level of collaboration, sharing and collective analysis of such information is largely absent and not proficient. That capability is critical to providing the FSOC with timely and relevant systemic monitoring information needed for a properly functioning systemic oversight regime.
Though it has begun to provide analytical and data-related services to the FSOC, the OFR has yet to announce that it has established secure computing environments for data storage and sharing. They are far behind on sophisticated techniques of data analysis needs, as well. These include taking inventory of the financial data held by the FSOC member agencies and establishing a proper system to both access and process such data using proper analytics and systemic risk metrics. Presently, we are far removed from creating the comprehensive and
operational data collection system that both Congress had intended and this Council envisions.
7. The time for leadership has long since passed
The time for action by the FSOC has long passed. We urge creation and public disclosure of a new plan for prompt initiation and completion of appropriate systemic risk steps as prioritized and outlined above. This Council strongly urges the FSOC to exercise leadership and act promptly to fulfill its Congressional mandate under Dodd-Frank to monitor, identify, and address in a forward looking way systemic risks to the US financial system. Further delay in addressing these risks prolongs the recovery and uncertainty for US financial markets while leaving them vulnerable to new and potentially more disastrous systemic disruptions.
About — The Systemic Risk Council (SRC or Council) is a private sector, non-partisan body of former government officials and financial and legal experts committed to addressing regulatory and structural issues relating to systemic risk in the United States. It has been formed to provide a strong, independent voice for reforms that are necessary to protect the public from financial instability.
Goal — Our goal is a system in which we can all have confidence.
Primary Concerns — Our overriding concern stems from the (1) lack of progress made by the members of the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR) to address several critical issues as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), enacted in 2010. That concern increases each day that the implementation of systemic risk reform languishes. A (2) sense of complacency has made reforms for effective oversight seem less urgent despite escalating problems elsewhere in the global financial system. In many ways, the financial system faces (3) larger potential challenges today than it did in the run-up to the 2008 crisis, given the (4) troubled state of the European Union and (5) uncertainties at home related to fiscal and monetary policy.
SRC’s Facilitative Role — It is essential that the FSOC show leadership in coordinating the rule-writing process to promote the development of cohesive, consistent regulations and provide clear and transparent explanations of the reforms in a way that is understandable to the general public. We have created this Council to assist in that effort.
To that end, the SRC initially will focus on the following issues, which we believe require priority attention by the FSOC and its members: