Oversight Council Begins Looking at Which Firms Are Systemic

A group of regulators charged with preventing another financial crisis met for the first time today under the chairmanship of Treasury Secretary Timothy F. Geithner and started the process of identifying companies whose failure could pose a risk to the broader economy.

The Financial Stability Oversight Council agreed to release questions for public comment on designating firms for increased supervision. The group also began work on implementing the so-called Volcker rule barring bank holding companies from trading for their own accounts.

Geithner said regulators would try “to preserve the right balance between the tough rules our system clearly requires, but we want rules that are still going to encourage innovation and competition.” He spoke during a part of the meeting at the Treasury Department in Washington that was open to media.

The council, which includes Federal Reserve Ben S. Bernanke and was created by the Dodd-Frank financial overhaul law, has the authority to recommend that the Fed and other agencies toughen rules to reduce risk at banks as well as non-bank financial institutions. Geithner said yesterday its authority could encompass firms such as American International Group Inc., the insurer bailed out by the government, and GE Capital.

Deciding which firms are systemically important “isn’t a matter of big, it’s a matter of how much reliance is placed upon the particular institution and its operations,” said Wayne Abernathy, an executive vice president at the American Bankers Association and a former Treasury official.

Stepping In

The council’s mandate is to gather together federal agencies with different areas of expertise monitoring the firms so that regulators can step in before the companies damage the rest of the financial system.

“We all have our individual interests, our skills, our perspectives,” Bernanke said. “This council allows us to pool those perspectives and each of us to learn from the rest of us what’s happening in the financial system.”

The group supplants the smaller President’s Working Group on Financial Markets, formed in response to the October 1987 stock market crash.

Brian Olasov, a managing director at the McKenna Long & Aldridge law firm in Atlanta, said he’s skeptical the council will be able to foresee financial crises.

“I don’t question whether the council is a worthwhile endeavor,” said Olasov, who specializes in banking and financial markets. “I just have reduced expectations on the council’s ability to see around corners.”

Council Components

The council also includes Securities and Exchange Commission Chairman Mary Schapiro, Federal Deposit Insurance Corp. Chairman Sheila Bair and Commodity Futures Trading Commission Chairman Gary Gensler.

The Dodd-Frank law allows stricter oversight “not just to banks, but to entities that are banks in all but name, whether you call them investment banks or AIG, or GE Capital,” Geithner said yesterday at a conference in Washington. Regulators can require “any institution that has potential systemic implications for the economy” to operate more conservatively, he said.

At a Senate Banking Committee hearing yesterday, regulators said the council won’t threaten the independence or authority of their agencies.

“It is important to remember that the council was formed to take a long-term, macro viewpoint,” Bair told the committee. “It was not meant to interfere with or complicate the ability of the independent agencies to fulfill their statutory mandates and move ahead with clearly needed reforms.”

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