Search Penny Hill Press

Tuesday, June 4, 2013

Financial Stability Oversight Council: A Framework to Mitigate Systemic Risk

Edward V. Murphy
Specialist in Financial Economics

The Financial Stability Oversight Council (FSOC) was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA; P.L. 111-203) in 2010 as part of a comprehensive reform of banking and securities market regulators. The council is charged with monitoring systemic risk in the financial system and coordinating several federal financial regulators. The 113th Congress may wish to monitor the performance, rulemaking, and policy recommendations of the council.

This report describes the mission, membership, and scope of the FSOC. It provides an analysis of several major policy issues related to the FSOC that may come before the 113
th Congress.

The DFA establishes a regulatory framework of which the FSOC is a consultative council. The new regulatory regime incorporates several policy tools to address systemic risk. The FSOC facilitates communication among financial regulators, collects and evaluates financial data to monitor systemic risk, and designates which financial institutions and financial market utilities will be subject to prudential regulation by the Federal Reserve Board (the Fed). Upon a determination of a threat to financial stability, a covered non-bank financial institution in danger of failing may under certain conditions be resolved by the Federal Deposit Insurance Corporation (FDIC), rather than through the bankruptcy process. The FSOC may under certain circumstances set aside some financial regulations for consumers if the rules create systemic risk.

The Office of Financial Research (OFR), a permanent staff of financial experts, supports the members of the FSOC. The OFR processes, monitors, and analyzes financial data gathered from member agencies and collected from reporting firms. The OFR contributes to the annual report issued by the FSOC. In the 2013 annual report, the OFR noted a number of positive trends, including increased capital levels and liquidity among financial intermediaries.

However, the 2013 report includes several areas of continuing concern. For example, several sources of wholesale funding (such as money market mutual funds and repurchase agreements) remain vulnerable to the risk of runs or fire sales. The housing finance system still relies on government support, although financial trends for the government-sponsored enterprises (GSEs) have improved. A number of operational issues, such as information technology and resilience against cyber-attacks, are ongoing concerns. Interest rates create additional concerns, including the reliability of benchmarks such as LIBOR, and the exposure of financial intermediaries to significant losses should market interest rates rise (sometimes referred to as yield spikes). Longterm budget issues, so-called fiscal imbalances, remain a concern although revenues have recently been rising as general economic conditions improve in the United States. Finally, the 2013 annual report discusses several factors in other countries that could negatively affect financial stability in the United States if conditions overseas deteriorate, including the resolution of European financial turmoil and Japanese macroeconomic policies.

This report is intended to be used as a reference by congressional staff working on financial issues. The macroeconomic policy rationales for various financial crisis-related issues are summarized, and a glossary is provided to assist in understanding technical terms. This report is not intended to be read from cover to cover, but instead may be more useful as issues related to the FSOC arise.

Date of Report: May 21, 2013
Number of Pages: 30
Order Number: R42083
Price: $29.95

To Order:

R42083.pdf  to use the SECURE SHOPPING CART


Phone 301-253-0881

For email and phone orders, provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.