Financial Stability Oversight Council Reform or Abolition?

Abstract

FSOC Reform or Abolition: The Financial Stability Oversight Council was created by the 2010 Dodd-Frank law to focus a single agency of government on the issue of predicting the sources of financial instability, but it has become an agent for destroying investors value in the financial markets by virtue of its power to designate non-banks as being systemically significant. The existence of the FSOC has arguably not made markets any safer and, along with the other provisions of Dodd-Frank, the FSOC has in fact contributed to a reduction in credit creation and liquidity. The FSOC has led to several large non-bank firms (Metlife & GE) exiting important markets such as home mortgages and consumer credit. There is no practical reason for the FSOC to exist apart from the fact that residents of Washington still seem to believe that they can legislate economic outcomes. This paper argues that, in view of these shortcomings, eliminating the FSOC should be the first priority for the next administration of either party.

Keywords: Dodd-Frank, Financial Stability Oversight Council, Federal Reserve, General Electric, MetLife, Prudential Financial, Financial Stability, Systemic Risk, SIFI, FSOC

JEL Classification: D4, G18, G38, H1, K2, L1, L5