What is the Financial Stability Oversight Council?

Published by Thomas Herold in Banking, Laws & Regulations

'Financial Stability Oversight Council' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

The Financial Stability Oversight Council is an organization that was created by the Dodd-Frank Act following the financial crisis of 2008. It possesses a clear legal mandate that provides an accountability to look for risks and respond to perceived upcoming threats to the United States’ financial stability.

This is the first time that a single organization has held such important responsibility. The group is actually headed by the Secretary of the Treasury. It combines the various experience and knowledge of state regulators, an insurance expert who is both independent and Presidentially appointed, and federal financial regulators.

The Financial Stability Oversight Council was granted first time powers by Congress to restrain and head off dangerous risks within the financial system. This Council can select a financial firm that is not a bank and mark it for intense supervision so that the firm can not threaten to blow up the financial system and its stability. As an aid in determining what qualifies potential risk to the country’s financial stability, this FSOC is allowed to obtain information and analysis from and supply information to the recently established OFR Office of Financial Research that is headquartered in the Treasury building.

Before the financial crisis erupted, the financial regulation in the United States focused exclusively on specific markets and institutions. This permitted gaps in supervision to expand amidst inconsistencies in the regulation. Standards weakened as a result. There was no one regulator responsible for watching over and dealing with the various risks to American financial stability. The threats often revolved around various financial firms which functioned at once in numerous interrelated markets. Because of this, critical portions of the financial system remained unregulated. The Dodd-Frank Act dealt with these failures by creating the Financial Stability Oversight Council.

The Financial Stability Oversight Council has many roles. It facilitates and coordinates regulation. They are tasked with sharing information and coordinating action with the agencies involved to deal with examining, making rules, developing policy, reporting, and enforcing their actions.

They are also to encourage gathering and sharing information among their various member organizations. If they are unable to gather enough information, they are to turn to the OFR to obtain information from individual companies they need to evaluate. Gathering and evaluating such information is supposed to eliminate blind spots in the financial system. By doing this they are fostering a more stable and less dangerous overall financial system in the United States.

The Financial Stability Oversight Council is also to select nonbank financial entities that need to be consolidated. Dodd-Frank identified companies that did not receive appropriate supervision and then led to the outbreak of the financial crisis back in 2008. The act provides the Financial Stability Oversight Council the authority which it needs to force supervision on such companies at entirely its own discretion.

The council also has the power to make recommendations for harsher standards for those firms they deem to be the biggest and most interconnected operations which provide increased risks to the system. This includes both banks and non bank financial organizations. As the Council learns about activities and practices that are threatening financial stability in the country, they are able to recommend tougher standards to the appropriate financial regulators.

The extensive powers of this Financial Stability Oversight Council are most clearly shown in their ability to choose to break up companies at will which they perceive to represent a clear and present danger to the nation’s financial stability. They can decide if action should be followed to break up these kinds of firms which they deem to be a grave threat to the United States and its financial stability.

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The term 'Financial Stability Oversight Council' is included in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.