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Financial Stability Oversight Council

Direction Under the Trump Administration

On April 21, 2017, a recently sworn in Pres. Trump issued a presidential memorandum directing the Treasury Secretary to review the FSOC’s procedures for labeling financial institutions as SIFIs.

(You can learn how presidential memorandums work here.)

The Treasury released the results of its review on November 17, 2017. The review recommended significant changes to the way the FSOC determines which financial institutions should be labeled systemically important.

Background

With the U.S. financial system on the brink of collapse in late 2008 - the result of a global financial crisis that began in 2007 - the U.S. government authorized a taxpayer-funded bailout of financial institutions that were deemed “systemically important.”

 

That is, certain financial institutions were deemed to be so large and so interconnected with other financial institutions, that their demise would threaten the stability of the entire global financial system.

 

Deciding that it would be too dangerous to let these institutions fail, the U.S. government used taxpayer money to rescue these organizations.

 

When the dust eventually settled on the financial crisis, the government turned to trying to prevent having to use taxpayer money to rescue financial institutions in the future.

Creation and Powers

 

To this end, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law on July 21, 2010.

 

Among other things, the Act created the Financial Stability Oversight Council (FSOC), a body that would be based in the U.S. Treasury and tasked with identifying risks to financial stability and reducing investor expectations that taxpayer-funded bailouts of financial institutions would occur again. 

The FSOC is chaired by the Secretary of the U.S. Treasury and consists of ten voting members:

The Treasury Secretary

The Chairperson of the Federal Reserve

The Comptroller of the Currency

The Director of the Bureau of Consumer Financial Protection 

The Chairman of the Securities and Exchange Commission (SEC)

The Chairperson of the Federal Deposit Insurance Corporation (FDIC)

The Chairperson of the Commodity Futures Trading Commission (CFTC) 

The Director of the Federal Housing Finance Agency

The Chairman of the National Credit Union Administration Board

One independent member who is nominated by the President and confirmed by the Senate and has expertise in insurance.

 

The Dodd-Frank Act gave the FSOC the power to designate banks and certain nonbank financial companies (e.g. insurance companies) as “systemically important financial institutions” (SIFIs).

 

Designating a financial institution as systemically important means that it becomes subject to enhanced regulatory oversight.

 

Of course, financial institutions dislike the additional regulatory scrutiny that comes with being label a SIFI.