Statement of
Arthur J. Murton, Director,
Division of Insurance and Research,
Federal Deposit Insurance Corporation
on
Oversight of the Financial Stability Oversight Council
before the
Subcommittee on Oversight And Investigations,
House Financial Services Committee
2128 Rayburn House
Office Building
April 14, 2011
Chairman Neugebauer, Ranking Member Capuano, and members of the
Subcommittee, thank you for the opportunity to testify today on behalf of the Federal
Deposit Insurance Corporation on issues related to the Financial Stability Oversight
Council (FSOC).
The recent financial crisis exposed shortcomings in our regulatory framework for
monitoring risk and supervising the financial system. Insufficient capital at many
financial institutions, misaligned incentives in securitization markets and the rise of a
largely unregulated shadow banking system permitted excess and instability to build up
in the U.S. financial system. These conditions led directly to the liquidity crisis of
September 2008 that froze our system of intercompany finance and contributed to the
most severe economic downturn since the Great Depression.
At the same time, the pre-2010 regulatory framework focused regulators narrowly on
individual institutions and markets within their jurisdiction. No one had a firm grasp of
the big picture of overall risk in the financial system. This allowed supervisory gaps to
grow and created an incentive for companies to engage in regulatory arbitrage to find
the weakest oversight or, worse, move to parts of the system that were virtually
unregulated. In addition to these regulatory gaps, the absence of a resolution process
for systemically important non-bank financial companies left financial regulators with
limited options for addressing problems facing such firms, creating a no-win dilemma for
policy-makers: bail out these companies or expose the financial system to destabilizing
liquidations through the normal bankruptcy process.
The landmark Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act) creates a comprehensive new regulatory and resolution regime that is
designed to avoid the severe economic consequences of economic instability. The
Dodd-Frank Act gives regulators new tools to limit risk in individual financial institutions
and transactions, enhances the supervision of large non-bank financial companies, and
facilitates the orderly closing and liquidation of large banking organizations and non-
bank financial companies in the event of failure.
Arthur J. Murton, Director,
Division of Insurance and Research,
Federal Deposit Insurance Corporation
on
Oversight of the Financial Stability Oversight Council
before the
Subcommittee on Oversight And Investigations,
House Financial Services Committee
2128 Rayburn House
Office Building
April 14, 2011
Chairman Neugebauer, Ranking Member Capuano, and members of the
Subcommittee, thank you for the opportunity to testify today on behalf of the Federal
Deposit Insurance Corporation on issues related to the Financial Stability Oversight
Council (FSOC).
The recent financial crisis exposed shortcomings in our regulatory framework for
monitoring risk and supervising the financial system. Insufficient capital at many
financial institutions, misaligned incentives in securitization markets and the rise of a
largely unregulated shadow banking system permitted excess and instability to build up
in the U.S. financial system. These conditions led directly to the liquidity crisis of
September 2008 that froze our system of intercompany finance and contributed to the
most severe economic downturn since the Great Depression.
At the same time, the pre-2010 regulatory framework focused regulators narrowly on
individual institutions and markets within their jurisdiction. No one had a firm grasp of
the big picture of overall risk in the financial system. This allowed supervisory gaps to
grow and created an incentive for companies to engage in regulatory arbitrage to find
the weakest oversight or, worse, move to parts of the system that were virtually
unregulated. In addition to these regulatory gaps, the absence of a resolution process
for systemically important non-bank financial companies left financial regulators with
limited options for addressing problems facing such firms, creating a no-win dilemma for
policy-makers: bail out these companies or expose the financial system to destabilizing
liquidations through the normal bankruptcy process.
The landmark Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act) creates a comprehensive new regulatory and resolution regime that is
designed to avoid the severe economic consequences of economic instability. The
Dodd-Frank Act gives regulators new tools to limit risk in individual financial institutions
and transactions, enhances the supervision of large non-bank financial companies, and
facilitates the orderly closing and liquidation of large banking organizations and non-
bank financial companies in the event of failure.
The FSOC is one of the most important new tools created by the Dodd-Frank Act and is
designed to fill the gaps in regulatory oversight. For the first time, one entity has the
collective accountability for identifying and constraining risks to the financial system as a
whole. My testimony will review the FDIC's participation on the FSOC, identify FSOC-
related issues that are of particular importance to the FDIC, and discuss actions of the
FSOC to date.
Background and FDIC's Participation in the FSOC
Among other things, the Dodd-Frank Act directs the FSOC to facilitate regulatory
coordination and information sharing among its members regarding policy development,
rulemaking, supervisory information, and reporting requirements. The FSOC is also
responsible for determining whether a nonbank financial company should be supervised
by the Board of Governors of the Federal Reserve System (Federal Reserve) and
subject to prudential standards, and for designating financial market utilities (FMUs) and
payment, clearing, or settlement activities that are, or are likely to become, systemically
important.1 The term systemically important financial institution, or SIFI, is used to
describe nonbank financial companies that the Council has determined should be
supervised by the Federal Reserve and subject to prudential standards. The FSOC has
the authority to recommend more stringent risk management standards for SIFIs and
large, interconnected bank holding companies, and can ultimately determine to break
up firms that pose a "grave threat" to financial stability. The Dodd-Frank Act also directs
the FSOC to issue specialized reports and conduct various studies.
In order to complete its day-to-day work, the FSOC has established a committee
structure. The Deputies Committee, which is comprised of senior officials from each
member agency, coordinates and oversees staff assigned to FSOC-related issues.
Among other things, the Deputies Committee is responsible for sharing information on
proposed policies and rules among member agencies.
Since the FSOC's main responsibilities revolve around systemic risk monitoring and
mitigation, the FSOC created a Systemic Risk Committee and two subcommittees on
which the FDIC and other members serve – "Financial Institutions" and "Financial
Markets." The Systemic Risk Committee is primarily responsible for making
recommendations to the FSOC regarding significant financial market and regulatory
developments and potential emerging threats to the financial stability of the U.S. The
Systemic Risk Committee also will help the FSOC carry out its responsibilities to report
on its progress to Congress. The Dodd-Frank Act requires that the FSOC produce
annual financial stability reports and that each voting member submit a signed
statement stating whether the member believes that the FSOC is taking all reasonable
actions to mitigate systemic risk.
The FSOC also has five standing functional committees, with each committee focusing
on one of the following key issues: 1) designation of nonbank financial companies for
supervision by the Federal Reserve; 2) designation of FMUs as systemically important;
3) recommendation to the Federal Reserve of heightened prudential standards
designed to fill the gaps in regulatory oversight. For the first time, one entity has the
collective accountability for identifying and constraining risks to the financial system as a
whole. My testimony will review the FDIC's participation on the FSOC, identify FSOC-
related issues that are of particular importance to the FDIC, and discuss actions of the
FSOC to date.
Background and FDIC's Participation in the FSOC
Among other things, the Dodd-Frank Act directs the FSOC to facilitate regulatory
coordination and information sharing among its members regarding policy development,
rulemaking, supervisory information, and reporting requirements. The FSOC is also
responsible for determining whether a nonbank financial company should be supervised
by the Board of Governors of the Federal Reserve System (Federal Reserve) and
subject to prudential standards, and for designating financial market utilities (FMUs) and
payment, clearing, or settlement activities that are, or are likely to become, systemically
important.1 The term systemically important financial institution, or SIFI, is used to
describe nonbank financial companies that the Council has determined should be
supervised by the Federal Reserve and subject to prudential standards. The FSOC has
the authority to recommend more stringent risk management standards for SIFIs and
large, interconnected bank holding companies, and can ultimately determine to break
up firms that pose a "grave threat" to financial stability. The Dodd-Frank Act also directs
the FSOC to issue specialized reports and conduct various studies.
In order to complete its day-to-day work, the FSOC has established a committee
structure. The Deputies Committee, which is comprised of senior officials from each
member agency, coordinates and oversees staff assigned to FSOC-related issues.
Among other things, the Deputies Committee is responsible for sharing information on
proposed policies and rules among member agencies.
Since the FSOC's main responsibilities revolve around systemic risk monitoring and
mitigation, the FSOC created a Systemic Risk Committee and two subcommittees on
which the FDIC and other members serve – "Financial Institutions" and "Financial
Markets." The Systemic Risk Committee is primarily responsible for making
recommendations to the FSOC regarding significant financial market and regulatory
developments and potential emerging threats to the financial stability of the U.S. The
Systemic Risk Committee also will help the FSOC carry out its responsibilities to report
on its progress to Congress. The Dodd-Frank Act requires that the FSOC produce
annual financial stability reports and that each voting member submit a signed
statement stating whether the member believes that the FSOC is taking all reasonable
actions to mitigate systemic risk.
The FSOC also has five standing functional committees, with each committee focusing
on one of the following key issues: 1) designation of nonbank financial companies for
supervision by the Federal Reserve; 2) designation of FMUs as systemically important;
3) recommendation to the Federal Reserve of heightened prudential standards