The centerpiece of the reform package is the establishment of a new framework for monitoring and regulating systemic risk. The crisis highlighted the vulnerabilities of the financial system to risks taken by individual financial services companies due to the highly interconnected nature of the financial sector, and, in some instances, a high degree of concentration. Risk-taking by one company can put the liquidity and solvency of other companies at risk, and one firm’s failure can cause multiple failures and create acute financial instability. The severe economic impact of the crisis, the expenditure of billions in taxpayer funds, and the compelling interest in preventing future taxpayer bailouts focused policymakers on the overarching objective of reducing systemic risk.
Despite widespread concern, policymakers in Congress and elsewhere disagreed on how to regulate and reduce systemic risk. Some believed that systemic risk should be separately monitored and regulated, while others maintained that better overall regulation of the various aspects of the financial system will best reduce or mitigate systemic risk. Both perspectives are represented in the legislation. The legislation touches upon nearly every facet of the financial sector, and, for the first time in US history, creates a framework designed solely to regulate systemic risk. That framework largely resides in a powerful council of financial regulators, a new authority allowing the Federal Deposit Insurance Corporation (FDIC) to seize control of a financial company whose imminent collapse is found to threaten the financial system, and enhancements to existing crisis management powers of the Federal Reserve and the FDIC.