Comparing Financial Stability Oversight Councils
Mar 16th 2010

Another extremely prominent part of Senate Banking Committee Chairman Christopher Dodd's (D-CT) new financial reform proposal is the Financial Stability Oversight Council he hopes to establish. In many ways, it resembles the House bill's "Financial Services Oversight Council." I thought it might be useful to see compare the two councils.

Both councils would serve essentially the same purpose. Each would be a group consisting of the heads of various regulators who seek to prevent systemic risks from destabilizing the financial system. A council would address the big picture issues and makes decisions regarding how to handle potential risks. But even though the two conceptions of what a council should do are mostly the same, there are some important differences in Dodd's version.

Council Members

First, who sits on each version of the council? Mostly the same regulators. The overlap includes the Treasury Secretary, Federal Reserve Chair, Comptroller of Currency, Consumer Financial Protection Agency/Bureau Director, Securities and Exchange Commission Chair, Federal Deposit Insurance Corporation Chair, Commodities Futures Trading Commission Chair and Federal Housing Finance Agency Director.

Then the differences begin. To round out voting members Dodd would add an independent insurance industry expert appointed by the President. He would then have a nonvoting member -- the Director of a newly established Office of Financial Research.

The House version would have neither of those parties on the council. It would add to its voting members the National Credit Union Administration Chair and the Office of Thrift Supervision Director. Its nonvoting members would include the Federal Insurance Office Director, a rotating state insurance commissioner, a rotating state banking supervisor and a rotating state securities commissioner.

The most notable difference is that Dodd's version gives an insurance industry expert some voting power, while the House version does not. The House bill also provides some voice to state banking. But since Dodd's version consolidates state banking regulation to the FDIC and OCC, it makes sense that he left other state banking officials out.

Voting

In both cases, the council votes on big decisions. But Dodd's version requires a two-thirds majority, while the House version appears to just require a simple majority. This would particularly affect two important decisions of the council: which non-bank firms would be subject to systemic risk regulation and which firms should be broken up.

I'm a little bit mixed on my opinion of whether this council should have an easier or more difficult time getting a majority vote. I think it might depend on what they're voting on. For the firms that need prudential regulation, a simple majority is probably sufficient. I think, in that case, it's best to err on the side of more closely watching additional bigger firms, instead of fewer.

In terms of break-up, however, I think a simple majority might be a little too easy. Rep. Paul E. Kanjorski (D-PA) originally offered the amendment that led to this authority being included in the House's bill. Dodd's November proposal contained more explicit break-up authority, but his revised version hones how this would work. I think, here, a two-thirds vote is prudent. It's an important and major decision to break up a firm. That shouldn't be taken lightly, so I worry a simple majority is too weak a standard.

Office of Financial Research

One major difference between the two reform proposals is that Dodd seeks to create an Office of Financial Research which would be responsible for collecting data on behalf of the council. It would be located within the Treasury. The House bill provides that duty to the Federal Reserve.

I'm a little bit unclear why this is necessary, unless Dodd doesn't believe the Fed should be trusted with this responsibility. I guess you could argue that having an office charged with this specific task could result in better data, but I'm not entirely convinced. I don't know that the problem in systemic risk oversight is a lack of data as much as a failure to harmonize that among regulators. I think the council would already do that through its mere existence and discussions. I don't think a specific office would harm this end, but I don't know that it really does that much to better achieve it either.

Hotel California Provision

Finally, there's the so-called "Hotel California" provision. This would require any firm who declared bank holding company status to get bailout funds to retain that status and potentially be subject to systemic risk regulation. Dodd indicated that this was the brainchild of Senator Bob Corker (R-TN). It got its nick-name through the lyric from the Eagle's song which says, "You can check out, but you can never leave."

The fear here is that some firms, like investment banks Goldman Sachs and Morgan Stanley, that were quick to claim bank holding company status to obtain financial assistance during the crisis, may want to shed that status if they would be subjected to additional regulation from Congress' bill. This would prevent that possibility. Goldman's CFO, in particular, has said that the firm has no intention of dropping its bank holding company status, but it's pretty easy to see where Corker is coming from on this one.

Overall, each version has some good ideas to offer. The hope, I think, would be that the best of both proposals ends up in the final version when the two Houses confer to decide what the final bill would look like. That is, of course, assuming that Dodd manages to get his proposal out of the Senate.