Three Questions For The Financial Stability Oversight Council

By Simon Johnson

The Dodd-Frank financial reform legislation of 2010 created a Financial Stability Oversight Council (FSOC), with the task of taking an integrated view of risks in and around the U.S. financial sector.  The FSOC is comprised of all leading regulators and other responsible officials, chaired by the Treasury Secretary.  So far, it has done little – fitting with the predominant official view being that in the post-crisis recovery phase, financial risks in the U.S. were generally receding rather than building up.

But this summer has established three important and related issues on which FSOC needs rule quickly.  These are: impending bank mergers that could create two more “too big to fail” banks; whether to force the break-up of Bank of America; and how to rethink capital requirements for large systemically important banks, particularly as the continuing European sovereign debt problems undermine the credibility of the international Basel Committee approach to bank capital. Continue reading “Three Questions For The Financial Stability Oversight Council”

An Early Stress Test For The Financial Stability Oversight Council

By Simon Johnson

How much damage to the financial system should we expect from what is now commonly called the foreclosure morass, the still-developing scandal involving document robo-signing (and robo-dockets), completely messed up mortgage paperwork and high-profile inquiries into accusations of systematic and deliberate misbehavior by banks?

The damage to banks’ reputation is immeasurable. They have undermined property rights – the ability to establish clear title is a founding idea of the American republic. They have mistreated customers in a completely unacceptable manner. If anyone doubted the need for a new consumer protection agency dealing with financial products – and the importance of having a clear-thinking reformer like Elizabeth Warren at its head – they are presumably silenced by recent events. (If you need to get up to speed on the basics of this issue, see this series of posts by Mike Konczal.)

But what is the cost in terms of additional likely losses to big banks? The likely size and nature of these are leading to exactly the kind of systemic risks that the Financial Stability Oversight Council was recently established to anticipate and deal with. Continue reading “An Early Stress Test For The Financial Stability Oversight Council”