Relationship between SEC and Systemic Risk Regulator
Another aspect of addressing systemic risk is defining the relationship between a systemic risk regulator and the primary regulators. If systemic risk regulation is truly focusing on the overarching risk concerns, the systemic risk regulator should be viewed as a supplement to - rather than a replacement for - the primary regulator, such as the SEC.
It is not hard to imagine a world where the mission of a systemic risk regulator is in direct conflict with that of the primary regulator. For example, envision a situation where a primary regulator is "encouraged" to drop an enforcement action because it may shake public confidence in a "too big to fail" firm. In such circumstances, a systemic risk regulator could crowd out the specialized regulatory agencies and, even more importantly, undercut their mission.
With these potential conflicts, it then becomes that much more important to analyze the current systemic risk regulation regime being contemplated by Congress and to ask the hard questions about how it will work. Currently, the legislation that was approved in the House of Representatives authorizes a new Financial Services Oversight Council (FSOC) with the task of monitoring systemic risk. This Council will be chaired by the Treasury Secretary, and the Federal Reserve Board (Fed) will operate as its agent. The Fed would be empowered to impose additional requirements on institutions and activities deemed systemically important.
The proposed legislation that has advanced from the Senate Banking Committee has a similar structure with a few differences.10 It also proposes a Council, the Financial Stability Oversight Council (Oversight Council) chaired by the Treasury Secretary, and charges it with monitoring and overseeing systemic risk. The Oversight Council, however, would be required to consult only with primary financial regulators rather than with both the Fed and such agencies as under the House bill. Non-bank entities would be subject to Fed oversight only if the Oversight Council made that determination by a super-majority vote.
Two crucial similarities between the House legislation and the proposed Senate bill are that the proposed systemic risk Council is chaired by the Secretary of the Treasury and would have wide-ranging authority to identify systemically important firms and impose enhanced prudential standards, and that the Council would rely heavily on the regulatory decisions and activities of the Fed.
As Congress considers authorizing this new regime, there must be consideration of its ramifications for the entire regulatory system. First, for example, there will be inherent tensions and conflicts that arise when one regulator has combined responsibility over monetary policy, a vested interest in the safety and soundness of particular institutions, and powers to address systemic risk. There is a danger that any organization with a focus on a particular industry and very broad powers could favor that sector to the potential detriment of others.
A second concern would be that any new legislation will take financial regulators that are independent entities and subject them to the leadership of a political figure - in this instance the Treasury Secretary. The independence of most financial regulators has benefited the financial system and the American public, and it should be maintained. If a systemic risk Council is created, we need to ask what safeguards will be put in place to insure that the independence of the regulators and of their regulatory decisions will not be tainted. How can we safeguard from political considerations dominating the process?
