Comparing Financial Stability Oversight Councils

Another extremely prominent part of Senate Banking Committee Chairman Christopher Dodd's (D-CT) new financial reform proposal (.pdf) is the Financial Stability Oversight Council he hopes to establish. In many ways, it resembles the House bill's (.pdf) "Financial Services Oversight Council." I thought it might be useful to see compare the two councils.

Both councils would serve essentially the same purpose. Each would be a group consisting of the heads of various regulators who seek to prevent systemic risks from destabilizing the financial system. A council would address the big picture issues and makes decisions regarding how to handle potential risks. But even though the two conceptions of what a council should do are mostly the same, there are some important differences in Dodd's version.

Council Members

First, who sits on each version of the council? Mostly the same regulators. The overlap includes the Treasury Secretary (who sits at its head), Federal Reserve Chair, Comptroller of Currency, Consumer Financial Protection Agency/Bureau Director, Securities and Exchange Commission Chair, Federal Deposit Insurance Corporation Chair, Commodities Futures Trading Commission Chair and Federal Housing Finance Agency Director.

Then the differences begin. To round out voting members (after those eight just listed) Dodd would add an independent insurance industry expert appointed by the President. He would then have a nonvoting member -- the Director of a newly established Office of Financial Research (explained below).

The House version would have neither of those parties on the council. It would add to its voting members (after the initial 8) the National Credit Union Administration Chair and the Office of Thrift Supervision Director (until abolished under the legislation). Its nonvoting members would include the Federal Insurance Office Director (an office which the House legislation would establish), a rotating state insurance commissioner, a rotating state banking supervisor and a rotating state securities commissioner.

The most notable difference is that Dodd's version gives an insurance industry expert some voting power, while the House version does not. The House bill also provides some voice to state banking. But since Dodd's version consolidates state banking regulation to the FDIC and OCC, it makes sense that he left other state banking officials out.

Voting

In both cases, the council votes on big decisions. But Dodd's version requires a two-thirds majority, while the House version appears to just require a simple majority. This would particularly affect two important decisions of the council: which non-bank firms would be subject to systemic risk regulation and which firms should be broken up.

I'm a little bit mixed on my opinion of whether this council should have an easier or more difficult time getting a majority vote. I think it might depend on what they're voting on. For the firms that need prudential regulation, a simple majority is probably sufficient. I think, in that case, it's best to err on the side of more closely watching additional bigger firms, instead of fewer.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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