The Controversy Over Systemic Risk Regulation
29 Pages Posted: 24 Jan 2010
Date Written: January 22, 2010
There is widespread support for a systemic risk regulator, in the United States and in Europe, but little agreement on which existing or new organization(s) should assume the task of regulating against systemic risk, the authority such a regulator should have, or the work such a regulator should undertake. In general, the debate about enhanced systemic risk regulation has been about whether central banks or other regulators should be required to assess systemic risk or such an assessment should be the job of others; whether a systemic risk regulator should also be a prudential regulator; and whether the regulator that assesses systemic risk should also have the authority to mandate changes in the financial markets or by financial institutions when dangers to the markets emerge. Much of this debate has been in the form of turf warfare between central banks and other regulators, and therefore the discussions have been less enlightened than one would have hoped given the magnitude of the problems uncovered during the financial meltdown of 2008.
The author believes that any systemic risk regulator should be an independent agency without responsibilities that would conflict with its duties to examine and make recommendations with regard to systemic risks. Accordingly, the author recommends the creation of a new agency, independent of the Executive and Congressional Branches, which could investigate and analyze systemic risks and make recommendations to the President, Congress or individual regulatory agencies, including the Fed, for action. Given the complex structure of the European Union (“EU”), it would seem that a systemic risk regulator for Europe would similarly have to be an advisory body within the framework of the EU. The EU Commission has proposed such a regulator.
This paper discusses what systemic risk is and the various proposals that have been made for a systemic risk regulator in the United States. Also discussed are the conflicts of interest between assessing systemic risk and acting as a prudential regulator. The consideration of similar issues in Europe are also addressed.
Keywords: systemic risk, Federal Reserve Board, Council of Regulators, GAO, Financial Regulatory Reform, European Financial Supervisors
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