Financial Stability Oversight Council (FSOC): Structure and Activities

Summary

The Financial Stability Oversight Council (FSOC) and its Office of Financial Research (OFR) were established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203) to address several potential sources of systemic risk. Some observers argue that communication and coordination of financial regulators was insufficient to prevent the financial crisis of 2008. To foster coordination and communication, the FSOC assembles the heads of federal financial regulators, representatives from state regulatory bodies, and an independent insurance expert in a single venue. The OFR supports the FSOC with data collection, research, and analysis.

The FSOC does not generally have direct regulatory authority; its role is to make policy recommendations to member agencies where authority already exists or to Congress where additional authority is needed. However, it is responsible for monitoring financial stability and designating nonbank financial companies and financial market utilities as systemic, which subjects those entities to heightened prudential regulation and the direct regulatory authority of other agencies. The FSOC considers a company to pose a threat to financial stability if a company’s financial distress or activities could be transmitted to other firms or markets, causing broader disruptions to financial intermediation or other financial market functions. Three of the many relevant factors used for designation include leverage, interconnectedness with other systemically important nonbank financial institutions (SIFIs), and whether a primary prudential regulator already has responsibility for the SIFI and the activity.

Additional FSOC and OFR responsibilities include

collection and analysis of financial data,

issuing nonbinding recommendations to member agencies,

facilitating the resolution of jurisdictional issues among member agencies,

issuing a congressionally mandated annual report, and

reviewing Consumer Financial Protection Bureau (CFPB) rules under some circumstances.

The FSOC is composed of 15 members: 10 voting members and 5 nonvoting members. Voting members include the chair of the FSOC (Treasury Secretary), heads of the banking agencies (Federal Deposit Insurance Corporation, Federal Reserve Board, Office of the Comptroller of the Currency, and the National Credit Union Administration), Securities and Exchange Commission, Commodity Futures Trading Commission, Federal Housing Finance Agency, CFPB, and an independent insurance expert appointed by the President. Nonvoting members include the directors of the OFR and Federal Insurance Office, and state regulatory representatives, one each for insurance, banking, and securities. If an agency is led by a commission or board, the chair is a member, not other commissioners or board members. Additionally, some FSOC actions require a supermajority council vote and an affirmative vote by the chair.

The FSOC also monitors regulatory gaps and overlaps to identify emerging sources of systemic risk. Regulatory gaps and overlaps occur in part because agencies have different policy missions and authorities. The financial regulatory architecture includes agencies that issue and enforce behavioral mandates and bans, balance a set of risky but permissible activities, and administer an emergency program or participate in the financial system similarly to a private firm. These diverse missions continue to create regulatory gaps and overlaps.

In the current Congress, the House has passed the Financial CHOICE Act of 2017 (H.R. 10) to amend the FSOC. The bill would repeal the FSOC’s ability to designate entities as systemic; eliminate the OFR; subject the FSOC to the congressional appropriations process; repeal the FSOC’s ability to set aside CFPB regulations; and modify council membership, voting procedures, open meeting requirements, and other duties. Additionally, the Financial Stability Oversight Council Insurance Member Continuity Act (P.L. 115-61) became law on September 27, 2017, and modified the term of the FSOC’s independent insurance member.