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Public Statements

Hearing of the Senate Banking, Housing and Urban Affairs Committee - Financial Stability Oversight Council (FSOC) Annual Report to Congress

Statement

By:
Date:
Location: Washington, DC

U.S. Senator Richard Shelby, ranking Republican on the Senate Committee on Banking, Housing and Urban Affairs, today made the following statement at a Committee hearing on the Financial Stability Oversight Council (FSOC) Annual Report to Congress.

Excerpts of Shelby's statement are immediately below in bold, followed by the full text of his prepared remarks:

"I had hoped that the Council would have provided this information in their Annual Report. Unfortunately, the report fails to address these significant areas. Rather than being a forward-looking study of the risks to the U.S. financial system, the report is largely a lengthy summary of statistics with lots of colorful graphs.

"Perhaps the most fundamental question left unanswered by the Council is: "What is systemic risk?" The term "systemic risk" is mentioned 37 times in Dodd-Frank.

"Secretary Geithner himself stated that, "You won't be able to make a judgment about what's systemic and what's not until you know the nature of the shock." I hope that we can all agree that it would be a bit too late by then.

"Â…the present challenge is whether the Council can clearly assess the risks posed by politically sensitive problems like the European debt crisis, the mounting Federal debt, or the excessive regulation of the U.S. economy.

"If the Annual Report is an accurate representation of the Council's progress, I remain as skeptical of its chances of success as I was when my friends on the other side of the aisle proposed its creation.

STATEMENT OF SENATOR RICHARD C. SHELBY
Committee on Banking, Housing and Urban Affairs
October 6, 2011

"Thank you, Mr. Chairman.

"Today, Secretary Geithner appears before the Committee as the Chairman of the Financial Stability Oversight Council to discuss the Council's Annual Report.

"It has been over a year since the Council was established as the centerpiece of Dodd-Frank. The Council is charged with three primary tasks: to identify risks to U.S. financial stability (so-called "systemic risks"), to promote market discipline, and to respond to emerging threats to the stability of the U.S. financial system. Secretary Geithner will have an opportunity to tell the Committee how he and his Council are fulfilling these ambitious mandates.

"I had hoped that the Council would have provided this information in their Annual Report. Unfortunately, the report fails to address these significant areas. Rather than being a forward-looking study of the risks to the U.S. financial system, the report is largely a lengthy summary of statistics with lots of colorful graphs.

"For example, the Annual Report does not provide much evidence that the Council was ahead of the Eurozone crisis. The countries of Spain and Italy are not even mentioned in the discussion of sovereign credit risk. In addition, it does not address, or even attempt to address, many of the key economic issues we presently face.

"Perhaps the most fundamental question left unanswered by the Council is: "What is systemic risk?" The term "systemic risk" is mentioned 37 times in Dodd-Frank. It is among the most important concepts embodied in the new law because any firms designated "systemically significant" are to receive additional scrutiny by the Federal Reserve. If the Council cannot define "systemic risk," it will be hard pressed to identify growing risks to the U.S. financial system, making it exceedingly difficult to "make sure that those risks do not threaten the health of the economy as a whole" -- to use your words Mr. Secretary. Consequently, the promise of Dodd-Frank and its creation -- the Financial Stability Oversight Council -- will go largely unfulfilled.

"In the year since the passage of Dodd-Frank, it has become clear that the Administration and regulators exaggerated their ability to measure and regulate systemic risk in the rush to pass the legislation. The Council devotes only one page in its 149-page Annual Report to "measuring systemic risk" and admits that directly measuring systemic risk is "challenging" and that "the development of systemic risk measures and models is in an early stage." Secretary Geithner himself stated that, "You won't be able to make a judgment about what's systemic and what's not until you know the nature of the shock." I hope that we can all agree that it would be a bit too late by then.

"This sentiment was echoed by Federal Reserve Board Governor Daniel Tarullo at a recent Fed conference on systemic risk, where he spoke on the need for additional academic research in this area. He admitted that "The complexity of some of these issues will require continuing attention" by researchers who are still at the very early stages of defining systemic risk and analyzing the government's role in reducing it. These difficulties arise from the fact that Congress instructed the Council to mitigate all systemic risks before it bothered to determine whether they could identify such risks, let alone mitigate them. This is a reoccurring theme with the passage and implementation of Dodd/Frank.

"Practically, this means that regulators will be making ad hoc decisions about which firms should be designated as systemically significant and how they should be regulated. Accordingly, I hope to hear from Secretary Geithner whether he believes the Council can establish a framework for effective systemic risk regulation that provides clear mandates for regulators and legal certainty for market participants.

"In the interim, the present challenge is whether the Council can clearly assess the risks posed by politically sensitive problems like the European debt crisis, the mounting Federal debt, or the excessive regulation of the U.S. economy.

"If the Annual Report is an accurate representation of the Council's progress, I remain as skeptical of its chances of success as I was when my friends on the other side of the aisle proposed its creation. Much of the Dodd-Frank Act was based on the idea that if financial regulators are given broad enough grants of authority they can prevent any harm and avoid any crisis. I don't believe that you can write enough regulations or build a bureaucracy big enough to achieve that goal.

"Nonetheless, Secretary Geithner now sits at the head of a new government body whose promise is just that. Perhaps today he can allay my fears and tell us how he intends to prevent all future financial crises.

"Thank you, Mr. Chairman."


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