The FSOC: Systemic Oversight or Overlook?

Surely one of the notable disappointments regarding implementation of the Dodd-Frank Act has been the Financial Stability Oversight Council. Even opponents of the legislation had hopes that the FSOC would succeed. Maybe it will, but there is scant evidence of it.

Intended to bring together the entire universe of U.S. financial regulators in the hope that doing so would identify and forestall new risks to the financial system, the FSOC two years in has not identified much and can therefore be credited with little forestalling. What is going on at the FSOC?

One of its first duties was to designate nonbank Systemically Important Financial Institutions (SIFIs), building upon Dodd-Frank's ham-handed declaration that any bank with more than $50 billion in assets was one. If Dodd-Frank exhibited an astonishing overreach by declaring the likes of Zions Bank or Huntington or Comerica — good banks as they are and important to their customers and communities — to be of potential concern to the U.S. financial system, the FSOC has underperformed by not naming to date a single nonbank financial competitor as a SIFI. The FSOC has declared a few "financial utilities" (such as clearing firms) to be SIFIs, but no insurance companies, no mutual fund groups, no nonbank financial conglomerates, none of the major investment houses we read about every day in the papers. The FSOC has promulgated waves of procedures for naming SIFIs, but only now are there signs that maybe a few firms as examples to others will at last be started down the lengthy bureaucratic gauntlet to SIFIdom.

I do not make the point to concur that SIFIs have much to do with systemic risk, by the way. The evidence is scant for that, too. It is hard to find a systemic breakdown that has come from the failure of a particular bank or financial firm. The sole exceptions might be Fannie and Freddie, which used government protection first to corner the market on standard mortgages and went from there to build thoroughfares into subprime financing. The point is that the FSOC has little to show for itself that matters, even with specific tasks assigned by law. In its most recent meeting, Treasury Secretary Timothy Geithner did some saber-rattling about money market funds, but actions were all recommended for a later day.

Meanwhile, in the systemic risk field there is much plowing and harrowing to be done that the FSOC seems to be overlooking. There is little sign of FSOC concern for depressed housing finance markets or for the threat to budding recovery posed by the half-dozen major mortgage rules being shepherded by the consumer bureau. Is there evidence that the FSOC is spending quality time considering how the proposed Basel III capital rules will further drive lenders away from the housing markets? Looking ahead for exactly these kinds of systemic dangers, whether generated by government or private sector, is what has been wanting. If the FSOC has a justification, it is to rise above both regulatory inertia and juggernauts and ask, "Do we really want to do this?"

Is it too bold to ask that the FSOC consider the systemic risks of prolonged suppression of interest rates? Are we to assume that no serious economic dislocations are taking place by the Federal Reserve's zero-to-almost-nothing interest rate policy? What have been the FSOC's deliberations about the eventual rise in rates some years hence, when that will mean major market losses for pension funds, mutual funds, and anyone else holding U.S. Treasury securities? Was the FSOC created to accept on faith the assertions of the Fed — or of any agency — that it has everything worked out and that the future will unfold according to plan?

If we cannot expect the FSOC to do these things, then what have we really achieved that is different or improved? Instead and more likely, the FSOC will be a shield against timely consideration of dangers, rather than an important place from which to identify serious systemic risks before they catch us as a nation and throw us into major meltdown. We hoped for better.

Wayne A. Abernathy is executive vice president for financial institutions policy and regulatory affairs at the American Bankers Association. Previously he served as assistant secretary of the Treasury for financial institutions and as staff director of the Senate Banking Committee.