By Brady Dennis
Washington Post Staff Writer
Monday, September 6, 2010; 5:24 PM
How's this for a daunting assignment: Monitor the entire financial landscape for risks that could spark another crippling crisis. Identify and supervise firms that could pose those systemic risks. And make sure they never grow so large, complex and leveraged that their failure can wreak havoc across the globe.
In a nutshell, that's the mission of the new Financial Stability Oversight Council, which in coming weeks will hold its first gathering to figure out how to accomplish those lofty goals.
Other provisions in the recently passed financial overhaul bill, including creation of a new watchdog to protect consumers, have garnered far bigger headlines. But for sheer power and reach, the council of regulators has few rivals.
"It's going to set the shape of U.S. financial regulation, especially for the very largest banks, for years to come," said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a Washington research firm. "It really will redefine any institution that's fingered" as systemically important.
The group will be led by Treasury Secretary Timothy F. Geithner and include the heads of the financial regulatory agencies. It's 10 voting members include the heads of the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.
The impetus for the council grew out of a recognition that, leading up to the financial crisis, no single regulator had the job of watching for risks across the system. That allowed companies such as insurance giant American International Group to grow so massive and so interconnected with other firms that its downfall in late 2008 threatened to cripple the entire financial system.
In a recent speech in Boston, deputy Treasury Secretary Neal Wolin said the new council has "a clear responsibility for examining emerging threats to our financial system, regardless of where they come from."
To that end, the council will have the authority to direct regulators to issue new rules regarding capital, liquidity and leverage levels and to impose more onerous rules on firms that it deems to be systemically important.
As a last resort, the council can agree by a two-thirds vote to break up large, complex firms if members agree that they pose a grave threat to the country's financial stability.
Council members will have at their fingertips another new entity, the Office of Financial Research, which will be staffed with economists, accountants and other specialists to help collect and analyze reams of real-time data, in hopes of identifying emerging threats to the financial system.
The group, which by law must meet within 90 days of July 21, the day President Obama signed the overhaul bill, is expected to supplant the President's Working Group, which was established by executive order by President Ronald Reagan after the "Black Monday" stock crash in October 1987. That group, which included some of the same officials, played a largely advisory role.
In a hearing last week before the Financial Crisis Inquiry Commission, FDIC chairman Sheila Bair said she hoped the new council would become "a forward-looking forum" that can halt systemic risks "before they result in damage to our economy."
But commission member John W. Thompson expressed skepticism about how effective the new council will be.
"Quite frankly, my experience in the private sector has been that councils are places where people go to opine and pontificate, and nothing ever gets done," he said. "Why should we believe that his council is going to be uniquely different and keep us out of trouble?"
"I'm glad you're skeptical," Bair responded. "It will put pressure on all of us to make sure that we don't just, you know, meet every quarter and look at each other. . . . We have ownership. If we don't do our job, then we should be held strongly accountable."