Financial Stability Oversight Council (§111)

The legislation squarely settles the question of who will be the nation’s systemic risk regulator. Through the Financial Stability Act of 2010, Congress has established a Financial Stability Oversight Council (Council) to monitor sources of systemic risk and promulgate rules that will be implemented by the various financial regulators represented on the Council. In most instances, the Council will reach decisions based on a majority vote. In certain circumstances,  however, a supermajority of seven votes will be required, one of which must be cast by the Treasury Secretary—effectively providing him or her with a veto. The Council’s collective decision-making model is intended to bring together diverse viewpoints, foster more carefully vetted decisions, and result in a more graduated approach to systemic risk regulation. The model has the potential, however, to foster possible bureaucratic turf battles, gridlock, and decreased accountability among individual regulatory agencies.

Who is on the Financial Stability Oversight Council?

The Treasury Secretary will chair the Council, which will have nine additional voting members:†

  • Chairman of the Federal Reserve Board
  • Comptroller of the Currency
  • Chairman of the Federal Deposit Insurance Corporation
  • Chairman of the Securities and Exchange Commission
  • Chairman of the Commodity Futures Trading Commission
  • Chairman of the National Credit Union Administration
  • Director of Federal Housing Finance Agency
  • Director of the Bureau of Consumer Financial Protection
  • A Senate-confirmed independent member with insurance expertise

Powers (§§ 112 – 115)

The Council will arguably become the most powerful regulatory body in the United States. Among other things, the Council will have the authority to:

  • designate—by supermajority vote—certain companies and other entities as “systemically important”
  • instruct the Federal Reserve to impose various measures to regulate systemically important companies, including requiring:
    • enhanced capital and leverage requirements
    • additional liquidity provisioning
    • mandatory contingent capital
    • resolution plans (commonly called “living wills”)
    • credit exposure reports
    • concentration limits
    • supplemental public disclosures
    • periodic stress testing
    • other risk management protocols
  • permit—by supermajority vote—the Federal Reserve to order systemically important companies to divest assets to avert a “grave threat” to US financial stability
  • collect information from financial regulators and elsewhere to monitor the financial system
  • identify regulatory gaps and other potential threats to US financial stability
  • facilitate greater coordination and conversation among financial regulators
  • resolve disputes among member agencies over a particular entity, product, or activity

The Council itself will not be a supervisory body, as it will neither engage in day-to-day examinations of the safety and soundness of particular institutions nor enforce market conduct rules. Those responsibilities will be left to the regulatory agencies represented on the Council. As discussed further below, companies identified by the Council as systemically important will be subject to regulation, supervision, and examination by the Federal Reserve.

Office of Financial Research (§§ 116 & 152 – 154)

To assist the Council in achieving its mission, Congress has created the Office of Financial Research (OFR) within the Treasury Department. Because Council members will meet only periodically and be devoted primarily to running the agencies they head, the OFR will be the central administrative body supporting the Council’s agenda. The Director of the OFR will have a nonvoting seat on the Council and will report directly to the Treasury Secretary. As the Treasury Department’s expert group on systemic risk, the OFR is charged with collecting data on behalf of the Council from member agencies and market participants. The OFR will no doubt shape the Council’s agenda by issuing reports identifying regulatory gaps and various threats to US financial stability, and by making recommendations regarding regulatory and supervisory measures for covered companies.

† The Council also includes five nonvoting members: Director of the Office of Financial Research, Director of the Federal Insurance Office, a state insurance commissioner, a state banking supervisor, and a state securities commissioner.