The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act, P.L. 111-203), a wide-ranging financial reform bill, created the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR) in response to the 2008 financial crisis. Some observers contended that gaps and silos in the federal financial regulatory system hampered regulators from effectively responding to threats to financial stability in the buildup to the financial crisis. FSOC was seen as a way of ensuring that regulators work together and consider systemic risks to overall financial stability that go beyond their usual, narrower remit. FSOC is a collaborative body headed by the Treasury Secretary whose other voting members consist of federal financial regulators and a presidentially appointed independent insurance expert. FSOC’s statutory mission is to identify risks to financial stability, promote market discipline, and respond to emerging threats to financial stability. It is not a regulator: If it identifies a regulatory gap or an emerging threat to financial stability, it can make recommendations to a member agency to take action (if that agency has authority to act) or to Congress (if no agency has existing authority). In 15 years, FSOC’s formal powers to recommend reforms to agencies has been used only once—for money market fund reforms in 2012. FSOC has rarely made formal recommendations to Congress to make legislative reforms, and Congress has not acted on the recommendations FSOC has made. FSOC has cataloged and at times coordinated agency actions in various policy areas. FSOC’s main rulemaking power is limited to designations. By two-thirds vote including the Treasury Secretary, FSOC may designate nonbank financial firms as systemically important financial institutions (SIFIs) or payment, clearing, and settlement systems as financial market utilities (FMUs). Designated SIFIs are subject to safety and soundness regulations by the Federal Reserve. Designated FMUs are subject to heightened risk-management standards by their primary regulators. Since enactment, four firms have been designated as SIFIs, all of which were de-designated by 2018. There have been eight FMUs continually since 2012. The previous three Administrations have issued guidance on SIFI designation that have alternately made it harder or easier to designate, and the current Administration has announced its intention to review the latest guidance from 2023. In the 119th Congress, H.R. 3682 would require FSOC to consider whether any other action could mitigate the systemic risk posed by a nonbank financial firm before designating that firm as a SIFI. The OFR supports FSOC by monitoring the financial system for systemic risk, conducting research, and collecting data. Congress has considered eliminating or defunding OFR, most recently in a version of the FY2025 budget reconciliation bill (H.R. 1) passed by the House. This provision was not included in the version of the bill that became P.L. 119-21. FSOC and OFR have seen swings in their budget and staffing levels across Administrations. Under current plans, OFR would have fewer employees in FY2026 than it has had since its initial ramp-up. Unusually for organizations that are not independent agencies or regulators, FSOC and OFR are not subject to appropriations and are funded through an assessment on large bank holding companies. This is the case although they are located within Treasury, which is otherwise subject to appropriations. Congress has debated whether FSOC and OFR should be moved onto appropriations. Congressional oversight of FSOC and OFR is provided by statutory requirements for annual reporting and testimony. Congress has not always held these annual hearings, particularly in the case of OFR. Greater coordination of systemic risk regulation across agencies may help reduce regulatory gaps and silos. It may also strengthen Treasury’s control over independent regulators and may make regulation more political and subject to policy U-turns when leadership changes. For example, FSOC’s focus on climate change as a source of systemic risk has been on again/off again under the past three Treasury Secretaries. Regulator independence has become more salient, because both President Trump and a majority of the Supreme Court have taken steps that may curb the independence of agencies.
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