Financial Message Board

Financial Stability Oversight Council

The US Senate just recently passed a new set of financial reforms. As part of these reforms they created the Financial Staility Oversight Council.

This council will consist of high ranking officials of the United States and will serve for a period of 6 years (for Voting members). Non Voting members will serve for 2 years.

Here's some key responsibilities of the new Oversight Council.

Identify Risks posed by large interconnected companies to the financial stability of the United States

A key characteristic of the financial crisis was the interconnectivity of related financial firms. Companies like Bear Stearns, owning huge exposures to other financial companies, including CDOs, a type of insurance against firms going bust or into default, were extremely interconnected and it was not clear to controlling authorities that this was the case! However, many people in the Financial Community did know.

The new oversight council will identify these types of companies.

Remove the expectation that companies are deemed 'too big to fail'

Seems sensible, but really 'Too big to fail' only became a catchphrase during the Crisis. There was no expectation by shareholders that this was the case before the crisis. The only way the government can demonstrate a real commitment to this is by letting mismanaged companies going to the wall. Seems like empty rhetoric to me.

Increase supervision of US non bank financial companies

This means that the committee can decide to increase the scrutiny on financial companies if their activities can cause financial distress. US institutions like Goldman Sachs and JP Morgan can expect to receive greater interference and indeed these regulations allow this. Bad times indeed for the investment bankers. Possibly, the companies could be expected to rein in risky trading activity or increase capital held. Either way, the investment kings of the world will not be happy about this but don't expect that they will really be that scared. They can confuse most politicians about the real risks of activity if they want to.

Follow this link to test your knowledge on the: Financial Stability Oversight Council.