Banking and Finance Law Daily Wrap Up, FINANCIAL STABILITY—Atlanta Fed article discusses SIFI failure versus financial system failure, (Sep 30, 2013)

Organizations Mentioned:Federal Reserve Bank of Atlanta | Financial Stability Oversight Council

By Andrew A. Turner, J.D.

An article published by Larry D. Wall, Executive Director of the Center for Financial Innovation and Stability at the Federal Reserve Bank of Atlanta, discusses Systemically Important Failure versus Financial System Failure. The Financial Stability Oversight Council's recent designation of two nonbank firms as SIFIs likely reduces the expected cost of their failure. However, Wall writes that reducing the expected cost of financial system failure will require a broader focus.

Addressing potential causes of a future crisis. If a buildup of risks is observed, Wall notes that the next step is taking actions to prevent or at least mitigate a future crisis.

The first step would be to use existing prudential authority to require regulated firms to adhere to sound credit practices.
A second possible step by prudential supervisors arises if they observe SIFIs making loans whose performance appears to depend upon rising collateral values. In this case, the supervisors could design a stress test scenario that measures large banking organizations and FSOC designated nonbank financial firms' dependence on increasing collateral values.
The third possible step, addressing the buildup of risks outside the prudential supervisory framework, may be more difficult. One possibility would be for FSOC to designate major players in a market as systemically important and therefore subject to prudential supervision and stress testing. A second possibility would be to address the potential risks through those aspects of the market that do touch the regulated financial system.
A fourth possible response would be to use tools intended for other purposes to support financial stability.
Finally, the FSOC is also required to make an annual report to Congress in which it identifies emerging threats and includes appropriate recommendations. If an end-to-end market review reveals a potential threat that cannot be adequately addressed with existing regulatory tools, the FSOC's report and the testimony of its members could be used to encourage appropriate congressional action.

IndustryNews: DoddFrankAct FinancialStability

Banking and Finance Law Daily Wrap Up, FINANCIAL STABILITY—Atlanta Fed article discusses SIFI failure versus financial system failure, (Sep 30, 2013)

Organizations Mentioned:Federal Reserve Bank of Atlanta | Financial Stability Oversight Council

By Andrew A. Turner, J.D.

Addressing potential causes of a future crisis. If a buildup of risks is observed, Wall notes that the next step is taking actions to prevent or at least mitigate a future crisis.

The first step would be to use existing prudential authority to require regulated firms to adhere to sound credit practices.
A second possible step by prudential supervisors arises if they observe SIFIs making loans whose performance appears to depend upon rising collateral values. In this case, the supervisors could design a stress test scenario that measures large banking organizations and FSOC designated nonbank financial firms' dependence on increasing collateral values.
The third possible step, addressing the buildup of risks outside the prudential supervisory framework, may be more difficult. One possibility would be for FSOC to designate major players in a market as systemically important and therefore subject to prudential supervision and stress testing. A second possibility would be to address the potential risks through those aspects of the market that do touch the regulated financial system.
A fourth possible response would be to use tools intended for other purposes to support financial stability.
Finally, the FSOC is also required to make an annual report to Congress in which it identifies emerging threats and includes appropriate recommendations. If an end-to-end market review reveals a potential threat that cannot be adequately addressed with existing regulatory tools, the FSOC's report and the testimony of its members could be used to encourage appropriate congressional action.

IndustryNews: DoddFrankAct FinancialStability