100 meetings in, has the Financial Stability Oversight Council found its footing?

WASHINGTON — The council that post-2008 policymakers created to spot and prevent the next financial crisis will reach a milestone this week: its 100th meeting. 

When the Financial Stability Oversight Council meets Thursday, it’ll be the 100th gathering of financial regulators in this forum, created by the Dodd-Frank Act in an attempt to tame the unwieldy U.S. financial regulatory system and impose order amid an uncertain financial future. 

Although some thought the council might be in its death throes after the Trump administration cut its budget and staffing and weakened its ability to designate companies as systemic risks, the council has spent the last roughly 18 months rebuilding under the Biden presidency.

Win McNamee/Bloomberg

Ahead of the Thursday meeting, Treasury’s Under Secretary for Domestic Finance Nellie Liang — who oversees and manages the council but is not a member — sat down with American Banker to discuss where FSOC has been and where it’s going. While she acknowledged the difficulties of rebuilding after the Trump administration, she said FSOC has been effective in bringing together regulatory agencies to tackle some big issues such as climate change and digital assets. 

“I think FSOC right now is in a very good place, it’s focused on issues that benefit from better communication and coordination and is building up a capacity to get there,” Liang said. 

Expectations versus reality

While FSOC has, at times, fallen short of its potential, some hoped that the Biden administration would usher in a new age for the council. 

Progressives, particularly those who hoped that FSOC would revive its ability to designate nonbank financial firms as systemically risky — the council’s biggest political stick — have been disappointed. They point out that FSOC could have sharp teeth if it chose, but that the body has largely focused on issuing reports and making recommendations, rather than more often using its most powerful tools. 

FSOC has the ability to designate nonbank firms, which would give those firms banklike oversight. Yet it has only done so with four companies, and all of those decisions have been reversed. In 2019, former Treasury Secretary Steven Mnuchin, a Trump appointee, issued guidance that changed the process for designating systemically important financial institutions, emphasizing the regulation of activities rather than companies. 

“It’s hard to see what they do now other than write their annual report,” said Steven Kelly, senior research associate at the Yale Program on Financial Stability. “It was majorly defanged under Mnuchin, so it’s less of an entity than it was when it was the reason that we had AIG designated, but they’re not really running in that business anymore to the extent that they were.” 

Liang, when asked if FSOC would be open to revisiting this guidance and its designation authority, said the council should “be able to use its tools if it needs to.” 

“We all believe that you should have at your disposal all the tools you have so you can use them when needed,” she said. “If it were needed, there would be some revisiting for sure.” 

The Trump-era decline

FSOC started from a blank slate after the Trump administration rendered the council largely ineffective, several sources familiar with the council said. 

Three sources familiar with the workings of FSOC described rebuilding the council essentially from the ground up at the beginning of President Biden’s term. One of the sources said the staff of FSOC even had to ask for its original office space back in the Treasury building after it was moved in the Trump years. 

FSOC’s budget dropped by about a quarter from the last Obama term to its lowest level in the Trump administration. In the first budget approved by the Biden administration, funding rebounded to slightly below where it stood in 2017. 

Staffing dropped as well: The Trump administration cut the number of approved potential full-time employees at FSOC from 36 to 18. The highest staffing under the Trump administration never reached above 15.

 In 2022, the Biden administration has approved 27 full-time employees, and counts 23 currently, including pending offers and currently onboarding workers. 

Liang said that the low staffing at FSOC, particularly in the beginning, makes the council more reliant on other regulators. 

“When FSOC’s own capacity is low, they have to rely on agencies more,” she said. “It’s harder, it slows the process down, [and] most of those people have other daytime jobs.” 

She also noted a competitive labor market when it comes to rebuilding FSOC’s ranks, part of a hiring challenge across the federal government. 

“It takes time,” she said. 

With the specter of the Trump-era cuts at FSOC, the possibility remains for policy watchers that the next administration, if there’s a turnover in political parties, could simply cut back again. 

While Liang said that the council has made itself a resource to other agencies, and that she believes the changes could be long-lasting because of that, others say that the council has been politically charged from the beginning and elections will likely continue affecting FSOC going forward. 

“Elections matter, so you had a more activist FSOC during the Obama years, pulled back with, Trump and now it's more activist during the Biden years,” said Don Kohn, former vice chair of the Federal Reserve and current senior fellow at the Brookings Institution. “The pendulum didn’t have to swing back and forth so widely had there been a different set of requirements and expectations at FSOC. So it’s been a bit of a disappointment” 

Still, there’s reason for optimism when it comes to the FSOC’s Biden-era comeback, said Patrick Pinschmidt, the first executive director of FSOC until leaving in 2016.

“There’s always a natural lag into a new administration, with new appointees coming in and getting people in the right seats before people start to kind of hit on the right kind of philosophy,” said Pinschmidt, co-founder of the fintech venture fund Middlegame Ventures. “I think we’re seeing an acceleration there in the FSOC’s relevance.” 

The future of FSOC

Not only have the influence and politics around FSOC changed in its 99 meetings to date, but the issues it wants to tackle have evolved. 

Climate risk to the financial system, the Treasuries market and nonbanks, as well as digital assets now dominate FSOC’s agenda – issues that Liang said demand interagency action which is something FSOC has succeeded at fostering in the last year. She pointed to work with Congress on digital assets, and that banking regulators have been conferring with each other on how to keep volatility from cryptocurrency out of the traditional financial system. FSOC has also issued a report on climate risk and created a staff-level committee on the issue, and Yellen has focused on the activities of open-end mutual funds and hedge funds in the market turbulence of March 2020. 

Pinschmidt said that one of FSOC’s primary purposes is to convene regulators to discuss issues that they all need to address, as well as to discuss regulatory gaps. This function is vital, and often overlooked when compared with more prominent powers such as the designation authority. 

“I think about it as providing a mechanism to share information, to go about doing things in a way that considers potential consequences to other parts of the market, not just within another regulators’ remit,” he said. 

Regardless of these new risks, Liang said that FSOC, and efforts around financial stability, will always be monitoring the risks of large banks. Banks served as a source of stability during the economic shutdown of COVID-19, and have withstood market turmoil from digital assets, a fact that Liang said is important for the economy going forward. 

“It’s the core of the system,” she said. “That’s where all the liquidity comes from when the markets become dysfunctional and it’s the conduit to the central bank as a lender of last resort. We wouldn’t let our guard down.”