Tomorrow the Financial Stability Council, a new institution consisting of the heads of the major regulatory agencies and chaired by the Secretary of the Treasury Tim Geithner, will meet and your humble correspondent will be there to cover the public portion of the event. The impeccable Damian Paletta has an informative preview of the council's dynamic -- namely, it's tricky for the Treasury Secretary, a political appointee, to herd turf-conscious independent regulators into coordinated action.
While some observers, including former Fed Chair Paul Volcker, predict that this process will be cumbersome and maybe even detrimental, my view is that squabbling is the necessary by-product of forcing regulators to work together on systemic issues and be cognizant of risks. Today, Deputy Treasury Secretary Neal Wolin testified before the Senate on exactly this topic:
[T]he Council has a clear statutory mandate and overarching responsibility to identify risks to financial stability, respond to any emerging threats in the system and promote market discipline. This is a mandate that previously did not exist. In the lead-up to this crisis, the regulatory framework focused regulators narrowly on individual institutions and markets, which allowed gaps to grow and inconsistencies to emerge that allowed arbitrage and weakened standards. Before the Dodd-Frank Act, no single institution had responsibility for monitoring and addressing risks to financial stability.
The theme as we move forward to implement the financial reform law is going to be this: It's going to be tough, and mistakes will be made along the way. That is, however, because the government will in many cases be asking regulators to do things they haven't done before, faster, and with more transparency. While regulators might prefer to avoid the kind of coordination that the council will impose, it's better to force this conversation and create an institution to manage it rather than hope informal discussions produce results.
-- Tim Fernholz
