Systemic risk oversight is on tap up on the Hill. (Though you wouldn’t know it with all the health care talk.) The House is laying the groundwork for a new division of Treasury called the "Financial Services Oversight Council" to monitor systemic risk. The Senate Banking Committee is going to be discussing the creation of a new, independent "Agency for Financial Stability" with much wider authority. Ironically, both ideas—as currently proposed—for creating a systemic risk regulator, which are based on the Obama plan from this summer, are dangerous to the health of the financial sector.
One of the dangers some believe we face is highlighted in yesterday’s WSJ in an op-ed from three former chairmen of the SEC. Roderick Hills, Harvey Pitt, and David Ruder write:
the Obama administration is on the verge of transferring accounting standards responsibility from the SEC to a systemic risk regulator. Such a radical move would have extremely negative consequences for our capital markets. […]
Today, the American Bankers Association, on behalf of many commercial banks, is seeking to prevent disclosure of the fair value of the financial instruments they own. It is attempting to persuade Congress that the safety and soundness of the banking system will be protected if a systemic risk regulator can prescribe accounting disclosures for financial companies.
The government shouldn't follow their advice. This change might well interfere with efforts by financial firms to raise capital. Investors will assume that the accounting standards they employ are designed to mask risks.
Read their whole column here.
I’ve written more about the Obama proposal for systemic risk in these two papers:
- Fixing the Regulation of Wall Street: A review of the Obama administration's proposal for reforming financial services regulation and recommendations to end the era of too big to fail
- The Future of Too Big to Fail and Bailouts: A comparison of the two plans to overhaul financial services regulation in the 21st Century