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The Financial Stability Oversight Counsel

posted by Stephen Lubben

I want to pick up on yesterday's post by Bob and friend and expand upon it a bit. Under section 111 of Chairman Dodd's proposed bill, the new Financial Stability Oversight Counsel will be made up of

  • the Treasury Secretary, who would serve as chair
  • the Federal Reserve Chairman
  • the Comptroller of the Currency
  • the Director of the new Bureau of Consumer Financial Protection
  • the Chairman of the SEC
  • the Chairman of the FDIC
  • the Chairman of the CFTC
  • the Director of the Federal Housing Finance Agency
  • and an independent member, who must have an insurance background, and would serve a 6 year term

This is a banking heavy group. Especially given that all the key votes by the Counsel require a two-thirds majority.

Felix Salmon noted in a recent post that "[o]ne of the problems with giving lots of supervisory authority to the Fed is that the Fed is run by economists who care primarily about setting monetary policy, as opposed to being run by bankers who care primarily about bank regulation and systemic risk."

Although this is on track, to my mind it does not go far enough. And from my lawyer's perspective, the distinction between economists and bankers is kind of like the difference between policemen and constables. Treasury, the Fed, and the rest of the crew are stacked with economists, bankers, and lawyers focused on banking law.

But one of the obvious lessons of the past two years is that there really is no such think as a unique universe of "banking" or banking law in a world where GMAC and E-Trade are offering home loans, people in the Netherlands have passbook accounts in Reykjavik, and seemingly simple online banks have $26 billion derivatives portfolios (table 1, here).

If this new Counsel is going to break out of the echo chamber, and avoid the mistakes of the past, it needs fresh perspectives. If this Counsel is going to oversee the "resolution authority," why not have an insolvency person at the table -- especially given that the Counsel is supposed to determine if the Bankruptcy Code is a viable alternative before invoking the resolution authority. How about somebody from a hedge fund (gasp!), who can provide the perspective of both a non-bank financial institution and that of a major customer of the banks? Maybe a tax lawyer, who can explain why a particular fund is incorporated in Ireland, has its bank accounts in London, its corporate headquarters in New York, and what about that subsidiary in Mauritius? Mauritius?

In short, I think one good amendment to the current structure of the Counsel would be a dramatic increase in the number of independent members -- perhaps to five, you don't want to make the Counsel a faculty meeting -- to expand the perspectives in the room and avoid the situation where the same group continues to do what they've always been doing, right on into the next next crisis.

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Comments

When I look at the members, I see one thing.....

Federal Preemption will rule the day. The banks would not be subject to any state laws at all. Not that there are many anyway that apply, but even those like UDAP will be preempted.

More power to the banks is all it means.

How about a volunteer from the authors of this website to act as an additional independent member?

Counsel? Council?

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