– In an op-ed published on CNBC.com, the Treasury Department’s Deputy Assistant Secretary for the Financial Stability Oversight Council (FSOC) Patrick Pinschmidt writes that FSOC is closing regulatory gaps exposed by the last financial crisis, and that proposals to roll back the Council’s tools would hamstring FSOC’s ability to protect U.S. financial stability and would leave our country vulnerable to another financial crisis.
Don’t risk another financial crisis
By Patrick Pinschmidt
In the years leading up to the financial crisis, the United States was ill-equipped to address the growing risks in the financial system. Our antiquated regulatory structure was unable to keep up with the changing financial marketplace, and no single entity had accountability for protecting the stability of the entire system. Even worse, some of the largest, riskiest nonbank financial companies in the world – like AIG – weren't subject to adequate oversight.
To close these regulatory gaps, President Obama championed and Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. Among its crucial reforms, the law created the Financial Stability Oversight Council – a body that brings the entire financial regulatory community together to identify and respond to risks across the financial system in order to help prevent another crippling financial crisis. Unfortunately, some are now seeking to hamstring the FSOC, threatening to turn back the clock and potentially pave the way for a future crisis. Here's why that's a mistake.
In the five years since it first convened, the FSOC has broken down interagency barriers and responded to potential weaknesses in the financial system, focusing regulators on critical issues ranging from cybersecurity vulnerabilities to addressing structural weaknesses in short-term funding markets. Through its work, the FSOC has created a culture of regulatory cooperation and interagency information sharing, making our financial system safer and more resilient.
One of the council's key responsibilities is to address the risk that any individual nonbank financial company could threaten the entire financial system. This isn't a judgment that a company is on the verge of failure. Rather, it is a recognition that if one of these designated companies were to experience distress, there could be significant consequences for the broader financial system and economy. This was a clear lesson from the financial crisis. Now, thanks to the work of the Council, there will be appropriate oversight for these companies, making the entire financial system safer and more secure.
Nevertheless, some advocates for the financial industry have accused the FSOC of being overzealous in its effort to protect financial stability. But the facts don't support their criticisms. Of the thousands of U.S. nonbank financial companies, the council has designated just four. And in each case, the council has taken a deliberative and data-driven approach that evaluates the facts on a company-specific basis. Under the council's current procedures, this multi-stage process relies on careful analysis of all available information, and includes intensive engagement with the company and its regulators to evaluate how the firm's distress could affect the financial system. The FSOC then provides the company with hundreds of pages of analysis detailing its findings, and an opportunity to rebut the Council's findings before any final decision is made.
Armed with this information, a company can act at any time to address the risks that the FSOC has identified. The council reviews its designation of each company annually, and it works closely with companies to evaluate whether they continue to pose risks to financial stability. Throughout this entire process, the council maintains an open-door policy so that companies and their regulators can make informed decisions about potential changes as they see fit.
Unfortunately, there is legislation pending in both houses of Congress that would heavily tip the scales back in Wall Street's favor and leave our country vulnerable to another crisis. These changes would take the council's methodical process and mire it in a series of protracted, bureaucratic steps that would require the council to spend as many as four years studying a company before it could take any action. Some of these proposals would also raise the standard for action by the council to a dangerously high threshold, all but ensuring inaction despite the risk to financial stability.
While some argue that these proposals would improve the effectiveness of the FSOC, there should be no mistake: if enacted, these proposals would impede the council's ability to respond to risks in the financial system.
As memories of the financial crisis recede, the voices of those trying to roll back reform will only grow louder. But we remember the costs of the last crisis, and we remember how we got there. We must remain vigilant. We need a body with a single-minded focus on protecting U.S. financial stability and identifying new threats on the horizon – and that's exactly what the council is doing.
Patrick Pinschmidt is the Deputy Assistant Secretary for the Financial Stability Oversight Council at the U.S. Department of the Treasury.